Johannesburg - Ratings agency Moody’s has warned that the drop in South Africa’s gross domestic product is bad news for the government’s development banks.
The lack of economic growth, high unemployment and high inflation were all cited as problems, making it harder for borrowers to repay the state-owned banks.
“Last Wednesday, Statistics South Africa released data showing that South Africa’s first-quarter 2016 GDP had contracted 1.2 percent on a quarter-to-quarter basis (seasonally adjusted and annualised), and on a year-to-year basis, had turned negative for the first time since the 2009 recession,” said Moody’s Credit Outlook report yesterday.
“In particular, the mining sector shrank by 18.1 percent on a quarter-to-quarter basis, while the agricultural sector contracted by 6.5 percent.”
Moody’s said the contraction in the mining and agriculture sectors was credit negative for the government-owned Industrial Development Corporation (IDC) and the Land and Agricultural Development Bank because both were highly exposed to those sectors.
The state’s Development Bank of SA (DBSA) would be negatively affected by the “challenging economic conditions”, but not as badly as the other two banks, said Moody’s. It rates all three banks as Baa2 with a negative outlook.
All three banks would be affected by the weak economy, as that made it more difficult for borrowers to repay loans. Moody’s said that, as of March last year, the IDC had about 29 percent of its equity investments and loans exposed to mining, so the contraction in the mining sector would reduce the IDC’s dividend income.
“Additionally, the IDC’s non-performing loans, which constituted 28 percent of gross loans as of March 2015, will rise,” said Moody’s.
The Land Bank has about 30 percent of total farm debt outstanding, which would probably worsen due to the GDP contraction in agriculture, said Moody’s.The outlook for the DBSA was slightly better.
“The electricity sector constituted around 44 percent of DBSA’s gross loans as of March 2015, and data shows that sector contracted 2.8 percent in the first quarter from the previous quarter.
“Much of that contraction was the result of fiscal tightening that caused a scaling back of the government’s infrastructural spending, which in turn will hamper DBSA’s growth prospects and financial performance.”
THE STAR