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BLOOMBERG File photo: Nadine Hutton
Johannesburg - A credit-rating downgrade will increase South Africa’s funding costs, put pressure on the rand and undermine financial stability, the Reserve Bank said.
“The lacklustre growth outlook and rising public debt remain the most crucial factors that can lead to negative ratings from the three ratings agencies,” the Pretoria-based central bank said in its Financial Stability Report, released in Johannesburg on Thursday. “South Africa therefore needs to implement policies that support economic growth, make further progress on fiscal consolidation and implement regulatory reforms that make it easier to do business.”
Fitch Ratings assesses South African debt at BBB, the second-lowest investment-grade level and on par with Moody’s Investors Service. Standard & Poor’s lowered its evaluation for South Africa in June to BBB-, one level above junk. Fitch and S&P will publish their reviews in June.
Finance Minister Nhlanhla Nene pledged in his February Budget to reduce the deficit to below 3 percent of gross domestic product in two years’ time after widening the target to 3.9 percent for the fiscal year that started on April 1. This will be done by increasing taxes and curbing government spending growth.
“The large fiscal deficit will make it difficult for the government to boost economic growth through increased spending,” the central bank said.
Power shortages in Africa’s most industrialised economy has weakened business confidence and company finances and can have “unfavourable consequences” for the stability of the financial system, the Reserve Bank said.
South African residents and businesses endured an 11th day of power cuts on Wednesday, the longest run in at least seven years, as electricity utility Eskom Holdings SOC Ltd battles to meet demand. The company is rationing power after decades of underinvestment in aging plants and as new facilities take longer than expected to come on stream.
While the weak economic growth outlook could undermine financial stability, the system remains resilient, the Reserve Bank said. South Africa’s banking industry is well capitalised and the curatorship of African Bank Investments Ltd in 2014 didn’t have a lasting negative effect on the funding costs of banks.
Bloomberg
