South Africa’s Baa1 credit rating remained under pressure, but that did not necessarily mean it would be downgraded, Moody’s Investors Service said yesterday.

The economy was still struggling to recover from recession and fiscal strength was weakening, Moody’s senior vice-president Kristin Lindow said.

“The economy cannot quite recover from the recession, though the recession was very mild here,” Lindow said.

“The indicative rating range of A2 to Baa1 does belie negative pressure, but it does not necessarily mean that the rating will be downgraded.”

Moody’s cut South Africa’s rating on September 2012 to the third-lowest investment grade. The outlook has been negative since November 2011.

The agency did not like to retain a non-stable outlook for a long time, Lindow said.

Moody’s also said local banks faced an increase in bad loans because of rising interest rates and the prevalence of unsecured lending.

Moody’s forecast banks’ non-performing loans would rise to 4.2 percent of gross loans in 2014/15 from 3.7 percent at the end of last year.

Higher interest rates and other sources of income, such as fees and commissions, would buttress revenue and net interest margins but profitability would come under pressure as lenders had to make more provisions for bad debt, Moody’s said.

The five biggest local banks reported a fall in impaired loans to R84 billion in December, or 3.1 percent of total loans, according to the central bank. But impaired credit is a bigger problem at smaller banks, ballooning to a peak of R24bn, or 17.4 percent of total loans, in July last year.

Unsecured lending accounts for almost 12 percent of gross credit exposure in the banking sector, central bank data show.

The overall outlook for banks remained negative, Moody’s said, because of subdued economic growth, weak consumption and protracted labour unrest. – Bloomberg and Reuters