Low growth, public debt jeopardise rates outlook

Johannsburg - A credit-rating downgrade will increase South Africa’s funding costs, put pressure on the rand and undermine financial stability, the South African Reserve Bank (Sarb) said.

“The lacklustre growth outlook and rising public debt remain the most crucial factors that can lead to negative ratings from the three ratings agencies,” Sarb said in its Financial Stability Report, released in Johannesburg on Thursday.

“South Africa therefore needs to implement policies that support economic growth, make further progress on fiscal consolidation and implement regulatory reforms that make it easier to do business.”

Fitch Ratings assesses South African debt at BBB, the second-lowest investment-grade level and on par with Moody’s Investors Service. Standard & Poor’s lowered its evaluation for South Africa in June to BBB-, one level above junk. Fitch and S&P will publish their reviews in June.

Finance Minister Nhlanhla Nene pledged in his February budget to reduce the deficit to below 3% of gross domestic product in two years’ time after widening the target to 3.9% for the fiscal year that started April 1. This will be done by increasing taxes and curbing government spending growth.

“The large fiscal deficit will make it difficult for the government to boost economic growth through increased spending,” the Reserve Bank said.

Power shortages have weakened business confidence and company finances and can have “unfavourable consequences” for the stability of the financial system, Sarb said.

Power rationing

Residents and businesses endured an 11th day of power cuts on Wednesday, the longest run in at least seven years, as power utility Eskom battles to meet demand. The company is rationing power after decades of underinvestment in ageing plants and as new facilities take longer than expected to come on stream.

While the weak economic growth outlook could undermine financial stability, the system remains resilient, Sarb said. South Africa’s banking industry is well capitalised and the curatorship of African Bank Investments in 2014 did not have a lasting negative effect on the funding costs of banks.