Pretoria - South Africa’s low economic growth has put the country’s sovereign credit rating at risk, says the South African Reserve Bank (SARB).
“Domestically, the low economic growth rate is presenting headwinds to the domestic banking sector and has put the country’s sovereign credit rating at risk,” said the central bank as it released its Financial Stability Review on Wednesday.
Heightened domestic political risk, low business confidence levels, a continued increase in government debt, a persistent current account deficit and slow implementation of the National Development Plan are highlighted as key threats to the country’s credit rating.
The Financial Stability Review aims to identify and analyse potential risks to the financial system’s solidity. The review was released ahead of rating agency Moody’s arrival in South Africa next week.
In Wednesday’s stability review, which is the last stability review for 2016, the SARB said since the last review in May, risks to the South African financial system have increased.
“Exogenous risks remained elevated as the South African financial system was exposed to an unstable global economic, financial and political environment that led to high levels of volatility in financial markets,” said the bank.
According to the review, the country’s economic and fiscal outlook are impacting on the perceptions of a credit rating downgrade.
“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,” said the central bank.
The review said South African banks have been subjected to a stress test in the adverse scenario of a downgrade to sub-investment grade.
“The results indicate that banks are adequately capitalised to deal with a downgrade to sub-investment grade,” said the SARB.
The review stated that short-term indicators of real economic activity suggest that the improvement in economic growth in the second quarter of 2016 is unlikely to be sustained in the third quarter.
In the first quarter of 2016, the country’s real gross domestic product (GDP) contracted by 1.2% before increasing by 3.3% in the second quarter. The weak global economic growth is expected to continue to weigh on economic and financial conditions in South Africa.
In September, SARB revised its growth forecast for the country upwards to 0.4% in 2016 from 0% previously. – SAnews.gov.za
