Rating agency Moody’s on Monday issued the clearest indication yet that its patience with South Africa's precarious fiscal position was wearing out. Photo: Reuters
JOHANNESBURG – Rating agency Moody’s on Monday issued the clearest indication yet that its patience with South Africa's precarious fiscal position was wearing out, warning that the shock first-quarter 3.2 percent gross domestic product (GDP) plunge was credit negative for the country's ratings.

Moody’s, which is the only major rating agency that still has the country's sovereign debt above junk with a stable outlook, said in a research note that, beyond the implications for the 2019 Budget, the historically large contraction in GDP would complicate the government's economic and fiscal policy.

Lucie Villa, the lead sovereign analyst for South Africa at Moody’s, said the government's policy objective to boost economic activity while consolidating its fiscal position would prove even more difficult in the low-growth environment.

“For instance, any fiscal stimulus would likely come with immediate or nearly immediate costs, but potential economic benefits that would take longer to accrue. Because we expect lower growth, we also expect South African banks’ asset quality to come under further negative pressure,” Villa said.

“Banks are already competing for better-quality borrowers, and revenue is under pressure amid competition from new entrants and widespread migration to mobile and digital platforms by established players.”

Moody’s has largely been seen as more lenient among the top three international rating agencies, with both Standard and Poor’s and Fitch having South Africa’s rating at junk.

In March, Moody’s opted to skip South Africa’s scheduled rating review, keeping the country’s debt rated at Baa3, the last investment grade.

Its next review is expected in November, after October’s medium-term budget policy statement.

The ratings agency, which last week warned the economy was facing high risk of entering into a technical recession, said poor first-quarter growth will weigh on the key banking sector.

South Africa's well-developed financial sector and markets have always been flagged by rating agencies as supporting the country's credit profile.

Nishlen Govender, portfolio manager at Citadel, said the GDP print, taken in the context of a country that continued to face economic pressure, meant that there would be a further downside to revenue and banks would struggle to cut costs further than they already had.

“I think the effect on share prices will be more pronounced than the effect on profitability. This is due to the fact that the GDP print is actually quite delayed in the context of economic indicators, and therefore provides colour on the weak profitability and loan growth that we have already seen,” Govender said.

“From a profitability perspective, banks have worked hard to reduce costs wherever possible, which has resulted in profitability and returns on equity that have still been reasonable and within target.”

South Africa's banks share prices tanked last week following the release of first-quarter GDP data.