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JOHANNESBURG — Credit rating downgrades are coming thick and fast in South Africa, with more possibly on the way. It’s now emerged that Moody’s – after downgrading South Africa’s rating on Friday – has now downgraded the country’s top five banks as well. This is in line with the deteriorating situation in South Africa and weaker macroeconomic outlook. If South Africa’s rand-denominated debt gets junked at some point in the future by most of the three major credit rating agencies, then the country will need to brace itself for a massive outflow of capital. One has to ask: Does the political will exist to stop the Zuma wrecking ball? – Gareth van Zyl
By Matthew le Cordeur, Fin24
Cape Town – Moody’s has downgraded the credit ratings of South Africa’s top five banks, three development finance institutions, certain City Power, MTN and Sanral credit ratings, and 10 regional and local governments.
The downgrades follow “the weakening of the South African government’s credit profile”, it said in a statement on Monday after the markets closed.
On Friday ratings agency Moody’s downgraded both the local and foreign currency rating to Baa3 from Baa2 and maintained a negative outlook.
The five banks – Standard Bank, FirstRand, Absa, Nedbank and Investec – have now all been downgraded to the same level as the country with the same negative outlook.
Reacting to the latest downgrades, Democratic Alliance finance spokesperson David Maynier told Fin24 that “the negative effects of President Jacob Zuma’s ‘midnight cabinet reshuffle’ are spreading like a disease throughout the economy and have now resulted in the downgrade of the five largest banks in SA”.
The rand was not affected by the downgrades and was trading 0.92% stronger against the dollar at 20:40 on Monday. The banks had mixed runs by the close of business and before the Moody’s announcement. Barclays Africa (Absa) was up 1.71%, Nedbank was down 1.95%, Standard Bank was up 0.77%, FirstRand (FNB) was up 0.7% and Investec was down 0.68%.
Regarding the development finance institutions, Moody’s downgraded the long-term foreign-currency issuer ratings of the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation of South Africa (IDC) and the long term local-and foreign-currency issuer ratings of the Land and Agricultural Development Bank of South Africa (Land Bank) to Baa3 from Baa2.
Land Bank’s local- and foreign-currency and DBSA’s foreign-currency short-term issuer ratings were also downgraded to Prime-3 from Prime-2. The outlook on all long-term global scale ratings is negative. At the same time, the rating agency affirmed the Aa1.za/P-1.za national-scale issuer ratings (NSRs) assigned to DBSA and Land Bank.
Moody's downgrades the five largest SA banks to Baa3; outlook negative 👈no surprises here either. Credit/debt about to get more expensive
— Angelo Coppola (@AngeloCoppolaSA) June 12, 2017
Regarding the downgrading of the banks, Moody’s said the primary driver is the challenging operating environment in South Africa, characterised by a pronounced economic slowdown, and weakening institutional strength that has led Moody’s to lower South Africa’s macro profile score to “moderate-” from “moderate”.
“The lower macro profile exerts pressure on the individual factors on banks’ scorecards, and implies that the country’s banks need stronger loss-absorption and liquidity buffers to withstand the headwinds and in order to remain at the same rating levels,” it said.
“The rating agency expects GDP growth of only 0.8% in 2017 and 1.5% in 2018, from 0.3% in 2016, levels significantly below the government’s target growth.
Earnings of SA's 5 big banks to come under pressure from tough economic climate, volatile asset prices & higher funding costs: Moody's
— Sure Kamhunga (@sure_kamhunga) June 12, 2017
“These challenging economic conditions, combined with potentially weaker investor confidence, volatility in asset prices, and higher funding costs will likely pressure banks’ earnings and asset quality metrics going forward, and challenge their resilient financial performance so far.
“In addition, the banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their liquid assets requirement, links their credit profile to that of the government. The top five banks’ overall sovereign exposure, including loans to state-related entities, averages more than 150% of their capital bases, according to South African Reserve Bank’s regulatory returns as of March 2017.”
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