South Africa’s banking system is robust enough to withstand a credit ratings downgrade, South African Reserve Bank (SARB) governor Lesetja Kganyago stressed on Thursday, as the country awaits a pending ratings review from agency Moody’s.
Kganyago was speaking at a press briefing following the latest meeting of the central bank’s monetary policy committee, which decided to keep the bank’s repo rate unchanged at 6.75%.
Much of the impact from a possible downgrade of South Africa’s sovereign debt to sub-investment grade would depend on the extent to which markets have priced this event in, said Kganyago.
“To the extent that the market has priced in a possible downgrade, then if a downgrade takes place, it shouldn’t have an impact on the financial markets,” he said.
But deputy governor Daniel Mminele acknowledged that “it cannot all be priced in at this stage” as some global investors are constrained from so called “front running” and can only adjust their positions once a ratings decision has been taken.
Late on Friday Moody’s is expected to make a call on South Africa’s sovereign credit rating, which it holds one rung above sub-investment grade, or junk, status but with a stable outlook.
It is the last of the three main ratings agencies, which include Standard & Poor’s and Fitch to rate South Africa’s debt at investment grade. Should it downgrade the country, South Africa will fall out of important global government bond indices, which are tracked by major global investment funds. This could trigger estimated capital outflows of between $8-billion and $10-billion.
Kganyago was nevertheless confident that local banks will be able to withstand the negative effects of such an event.
In 2016, the SARB conducted a series of stress tests of the local banking system, to assess whether it could withstand a possible downgrade, he said. Under the most adverse scenario it is expected that such a downgrade could lead to a protracted decline in economic growth, the depreciation of the currency, a rise in inflation and rising borrowing costs for the government and the country at large.
