SARB sees high risk of more credit downgrades

Johannesburg - South Africa faces a high risk and probability of further downgrades to its credit ratings, which may weaken the currency and lead to higher borrowing costs, the SA Reserve Bank (SARB) said.

Having been cut to junk by both S&P Global Ratings and Fitch Ratings Ltd. this year, the country may suffer more of the same as a result of weak economic growth, political developments, liabilities linked to struggling state-owned companies and slow progress in structural reforms, the SARB said in its Financial Stability Review published on Tuesday.

S&P and Fitch reduced their assessments on the country's foreign-currency debt to below investment grade after President Jacob Zuma fired Pravin Gordhan as finance minister at the end of March in a late-night cabinet reshuffle. While the country’s lenders remain well capitalised and carry more cash than regulators require, further downgrades would have a high impact on the country’s financial stability, the reserve bank said.

Representatives from Moody’s Investors Service, which has South Africa at the second-lowest investment grade level, plan to visit the country in coming weeks to review its ratings. A further deterioration in the ratings may lead to capital outflows, cause funding costs to increase and reduce credit available for businesses, the SARB said. The severity will depend on the extent to which further downgrades are already priced in, it noted.

“Further downgrades on the local currency rating could trigger high levels of selling off of bonds by foreign investors, which could also result in marked currency depreciation,” the Reserve Bank said.

It added that South Africa was excluded from one global bond index last month and will be removed from three more this month.

The thought of being excluded from more indexes is “disconcerting given the country’s dependency on portfolio inflows to finance its current account deficit, among other things,” the reserve bank said.