Mariam Isa And Renee Bonorchis
12 November 2008
Johannesburg — STANDARD & Poor's (S&P) revised its outlook on SA's sovereign credit rating to "negative" from "stable" yesterday, warning that capital outflows could depress the rand more, keeping inflation high and delaying expected cuts in interest rates.
The decision followed a similar step by Fitch Ratings Agency earlier this week, adding to concern that fallout from the global financial crisis may lead to a downgrade to SA's investment-grade credit ratings.
Treasury director-general Lesetja Kganyago described the news as "disappointing" and a reminder that SA should stick to the prudent fiscal policies which have supported its credit rating at a time when other countries are being downgraded.
"If we maintain prudent economic policies there will be no threat to our rating," he said from Sao Paulo.
"You don't change your anchor in the middle of a storm -- you can't even think of venturing into reckless policies, you must stay the course. There is no room for policy error."
Kganyago was responding to speculation by Fitch that if SA's economy tips into recession, some of its business-friendly policies may be challenged, especially after next year's election.
S&P pointed out that if SA kept its commitment to growth-enhancing reforms and prudent fiscal policies after the election, this would support its rating.
"In the context of turbulent global markets, however, a loosening of macroeconomic policies would put downward pressure on the ratings," it said.
S&P affirmed its BBB+ rating for SA's foreign currency debt, and said local banks should weather the domestic slowdown well, as they had limited exposure to the global credit crunch.
But at the same time, Fitch revised its outlook for three of SA's biggest banks -- Absa, Investec and Nedbank -- to "negative" from "stable" in a move seen as inevitable after its revision to the country's rating outlook.
Fitch said the step reflected "a deteriorating macroeco- nomic environment and its anticipated impact on the financial performance and financial position of the banks".
Local banks -- according to the Reserve Bank, the International Monetary Fund and other commentators -- are well capitalised and still lending to each other, unlike many of their global peers.
Cas Coovadia, head of SA's Banking Council, described the outlook revision as "ridiculous".
But banking stocks fell, in response to the news and following a further plunge in global equity markets. Absa's price dropped more than 5% yesterday, while Nedbank was down 4% and Investec shed 2,1%.
S&P analyst Remy Salters warned yesterday that net portfolio flows -- which refers to foreign buying of local shares and bonds -- would "remain negative" for SA in the short term.
Given the large deficit on SA's current account -- its broadest measure of trade in goods and services -- the outflows would put more pressure on the rand, which has fallen 34% against the dollar this year.
"This will prolong inflationary pressures and delay monetary easing, at a time when growth is slowing rapidly," Salters said.
Growth in SA's economy is expected to slow to 3,5% this year from 5,1% last year, and then moderate to 2,6% next year, according to a Reuters poll. The estimates are lower than official forecasts, but show the economy is still relatively buoyant when many of the world's biggest are sliding into a full-blown recession.
Local markets are betting that interest rates will start to fall next year, as inflation subsides after reaching record levels this year.
Kganyago said weakness in the rand was being offset by a dramatic plunge in the price of oil, which would help mute imported price pressures. If SA had a large deficit on its budget as well as its current account, the country would now have "huge problems", he said.
Fitch's revision to the outlook for Absa, Investec and Nedbank was a direct result of the change to the country's outlook, he said.
Fitch said both Standard Bank and FirstRand had recently had negative changes to their outlooks and/or ratings, which appeared to be why they were not adjusted yesterday. The rating agency is due to review its annual ratings for South African banks in July next year.
Not all of the news from Fitch was bad. Tom Boardman, CE of Nedbank, noted that in its review of emerging markets Fitch had pointed out that SA had not needed to provide direct or indirect local or foreign currency support to its banking system, "which remains one of the strongest among emerging markets".
"This is not a rating downgrade," Boardman said.
Winfried Bischoff, global chairman of Citigroup who was in SA yesterday, said local banks were solid with good capital bases.
Nonetheless, Citigroup was not in the mood to acquire any of them. "This is not the time to buy banks. There may well be opportunities, but this is the time to reserve your fire power," Bischoff said.
Investec said yesterday it did not comment on rating agency outlooks.
"They are standard procedure from a rating agency perspective. They have taken a view on the country and therefore all South African companies who have foreign currency ratings expect their ratings to then be placed under review," Investec said.
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