Johannesburg - South African banks are adequately capitalised to deal with a possible downgrade in the country’s sovereign credit rating to sub-investment grade, the governor of the Reserve Bank, Lesetja Kganyago, said on Wednesday night.
Speaking at the release of the bank’s second financial stability review, Kganyago said a credit downgrade was likely to result in short-term losses in the domestic and bond markets, as well as an outflow of capital. But he said these were unlikely to destabilise domestic financial markets.
“The economic and fiscal outlook for South Africa, coupled with political risk, has continued to impact perceptions of the likelihood of a sovereign credit rating downgrade. In the unlikely event of a downgrade, South Africa might experience initial short-term losses in the domestic currency and bond markets, as well as an outflow of capital, but these developments are not expected to have a destabilising effect on the functioning of domestic financial markets,” Kganyago said.
He said that South African banks had been subjected to a stress test in the scenario of a downgrade, and the financial sector had been exposed to a global financial and political environment, which led to heightened volatility in financial markets.
“Eight years after the global financial crisis, growth has been slow and the precarious nature of recovery remains visible. As a result, new threats are emerging from the global environment,” he said.
While many analysts in South Africa said that the country was now at greater risk of a downgrade compared with the last time the agencies rated the country, Kganyago was more optimistic than he was at the release of the first review earlier this year.
He said since the release of the first edition of the review, the different rating agencies had affirmed South Africa’s rating. In addition to that, a number of metrics had improved, he said.
“We had the medium-term budget policy statement, which reconfirmed the path to fiscal consolidation.
“You also had the pronouncement by the rating agencies that the probability of a downgrade is low. Remember these are probabilities. That means the risk can still be there,” he said.
The uncertain global environment was expected to continue to weigh in on economic and financial conditions in the country.
In the review, the bank said the political climate in many jurisdictions had been characterised by more populist and inward looking policies.
The bank warned of slower growth in the third quarter of this year. It said said short-term indicators of real economic activity suggested the improvement in economic growth in the second quarter was unlikely to be sustained.
In September, the bank revised economic growth forecast from 0 percent to 0.4 percent, while it forecast economic growth for next year and 2018 would be 1.2 percent and 1.6 percent, respectively.
It said South African equities failed to take advantage of increased appetite towards emerging markets and underperformed its emerging market peers.
“The underperformance was largely due to South Africa’s deteriorating economic fundamentals. During the period under review, the JSE all share index recorded marginal gains of about 2 percent,” it said.
Kganyago said that the unexpected election of Donald Trump as US president was unlikely to have an effect on South Africa’s interest rates trajectory.