Johannesburg - A downgrade in South Africa would affect the country’s banks, and present the risk of contagion in nearby countries where South African banks operate, according to the latest report by the Institute of Chartered Accountants in England and Wales (ICAEW).
The ICAEW said on Friday in its Economic Insight: Africa report for the fourth quarter 2016, South Africa’s volatile political landscape has heightened fears that one of the major ratings agencies would downgrade the country’s credit rating to junk status in the near term.
“If this happens, South Africa’s major banks may come under pressure: their credit ratings could be downgraded too, which would force them to pay more for their reserves and squeeze their interest margins.”
The ICAEW said the reach of South Africa’s banks into neighbouring economies meant that a sovereign downgrade for South Africa would be felt across the region. In turn, given the large footprint across Africa of South Africa’s largest banks - Standard Bank, Barclays Africa, FirstRand and Nedbank - some financial contagion might occur through a decline in financial support to subsidiaries or a slowdown in expansion plans.
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“While contagion would be greatest in the Common Monetary Area (South Africa, Lesotho, Namibia and Swaziland), risks are also elevated in other countries where financial sectors in general are already under immense pressure, such as Angola, where three of South Africa’s largest banks have a presence. This kind of contagion may delay improvements in companies’ opportunity to gain access to business financing in this region.”
On the growth prospects for 2017/18 in the region, the ICAEW said given the size of the economy, South Africa has a large influence on the growth prospects of the Southern Africa region. “With South Africa’s real gross domestic product growth to be close to zero this year, the region as a whole is expected to expand by less than 1percent in 2016. While relatively healthy growth rates are still projected for other economies in the region, these are constantly lower than initially anticipated.”
The professional body said Mozambique is one such example, with the country’s numerous debt scandals leading to crippling inflation and a sharp depreciation of the local currency. It said the economy was originally forecast to expand by more than 7 percent in 2016, but the latest projection comes in at only 4.3 percent.
“Economic expansion in the Southern Africa region is forecast to accelerate slightly in 2017, but remain well below historic averages of 1.7 percent.”
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In a separate report on Saturday, the Institute of International Finance said on its recent visit to South Africa it found an economy struggling to grow against a backdrop of increasing political strains, weak confidence, and the need to keep macro policy tight.
It said against this background, both business and consumer confidence remained weak and activity subdued.
The global association of the financial industry said it expected a modest recovery in growth next year to a projected 1.3 percent as positive supply side factors kick in.
“The recent rebound in commodity prices will give a boost to mining; the return of more normal rains after a severe drought will lift agriculture; and an increase in generating capacity has removed the electrical constraints.
“However, no recovery in private sector investment is likely until political uncertainty diminishes (2018 at the earliest), which will limit job growth and keep unemployment high.”