Due to another possible downgrade of South Africa’s debt, banks in South Africa anticipate a crisis in relation to the upcoming credit ratings, and have been working on proactive strategic measures, bracing for the worst.
The credit assessment on the country’s local-currency bonds is at stake, namely, for South African lenders. Such credit assessment accounts for 90 % of the government’s issued debt.
The rating companies S&P Global Ratings and Moody’s Investors Service, that still rate rand-denominated debt as investment grade, are to release their latest reviews on Nov 24th. If either of these evaluations indicates a change, South Africa faces to be removed from some indexes tracked by global investors, which would affect outflows and increase borrowing costs.
Since 2015, FirstRand Ltd, South Africa’s second-biggest bank by assets, has been working on proactive strategies to mitigate the impacts of the then-foreseen downgrade; the strategies include adjusting credit origination, and boosting liquidity and capital buffers, according to Andries du Toit, the treasurer at Johannesburg-based FirstRand Ltd.
To create an offshore source of revenue and acquire income in a currency other than South Africa’s rand, FirstRand Ltd recently offered to buy all of the U.K.’s Aldermore Group Plc for about 1.1 billion pounds ($1.4 billion).
At the end of March this year, S&P and Fitch Ratings Ltd. downgraded South Africa’s foreign-currency debt to nothing, right after President Jacob Zuma fired former Finance Minister Pravin Gordhan.
Mike Davis, Nedbank Group Ltd.’s executive for balance-sheet management told the media that Nedbank has been aware of the risk for a long while and has been preparing by applying conservative lending policies with high levels of provisions, high capital buffers and diversified funding sources.
Arno Daehnke, the finance director of Johannesburg-based Standard Bank, Africa’s largest lender, commented on the fact that Standard Bank will not be able to achieve credit ratings above that of its home market, despite having operations across 19 other countries on the continent. “It is difficult to pierce the sovereign ceiling, even after the consideration of foreign-asset holdings.”
He added, “The bank undertakes scenario planning on an ongoing basis, including the possibility of a downgrade of the sovereign local-currency rating to sub-investment grade. The bank accesses a diverse source of retail and wholesale funding markets, and the mix is not expected to change materially in the next two to six months.”