South African Central Bank Sees High Risk of More Downgrades

(Bloomberg) -- South Africa faces a high risk and probability of further downgrades to its credit ratings, which may weaken the currency and lead to higher borrowing costs, the country's central bank said.

Having been cut to junk by both S&P Global Ratings and Fitch Ratings Ltd. this year, the country may suffer more of the same as a result of weak economic growth, political developments, liabilities linked to struggling state-owned companies and slow progress in structural reforms, the South African Reserve Bank said in its Financial Stability Review published in Pretoria on Tuesday.

S&P and Fitch reduced their assessments on the nation's foreign-currency debt to below investment grade after President Jacob Zuma fired Finance Minister Pravin Gordhan at the end of March in a late-night cabinet reshuffle. While the country's lenders remain well capitalized and carry more cash than regulators require, further downgrades would have a high impact on the country's financial stability, the central bank said.

South Africa has the ability to regain its investment grade, though how long it will take depends on how quickly the country deals with the negative factors that caused the downgrades, Reserve Bank Governor Lesetja Kganyago said in response to questions after the presentation of the review. The country must address the concerns of the ratings companies, he said.

Moody's Visit

Representatives from Moody's Investors Service, which has South Africa at the second-lowest investment grade level, plan to visit the country in coming weeks to review its ratings. A further deterioration in the nation's ratings may lead to capital outflows, cause funding costs to increase and reduce credit available for businesses, the central bank said. The severity will depend on the extent to which further downgrades are already priced in, it said.

“Further downgrades on the local currency rating could trigger high levels of selling off of bonds by foreign investors, which could also result in marked currency depreciation,” the Reserve Bank said. South Africa was excluded from one global bond index last month and will be removed from three more this month, the central bank said.

The thought of being excluded from more indexes is “disconcerting given the country's dependency on portfolio inflows to finance its current account deficit, among other things,” the central bank said.

To contact the reporter on this story: Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net.

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Vernon Wessels, John Bowker