There is a medium to high probability that South Africa’s debt will be downgraded to non-investment status, according to the country’s central bank.
The cut may lead to capital outflows, affect government’s rand-denominated debt, increase the cost of funding and reduce credit to the private sector, the Pretoria-based South African Reserve Bank said in its Financial Stability Review on Tuesday. Spreads on credit-default swaps would also widen, corporate profits decline and household debt levels would increase along with financing costs, the central bank said.
South Africa risks losing its investment-grade status with S&P Global Ratings due to review its BBB- assessment in June. Moody’s Investors Service put its assessment, which is one step higher, on review for a downgrade in March. Despite the risk of a cut, South Africa’s biggest banks have undergone common scenario stress tests and could withstand significant credit losses, according to the central bank.
Other risks for the country’s largest banks, which include Standard Bank Group Ltd. and FirstRand Ltd., include “spillovers from excessive volatility and risk aversion in global financial markets” and continued low economic growth in South Africa, the central bank said. “Despite some serious headwinds, the financial system is assessed as remaining robust, characterized by well-capitalized, liquid and profitable financial institutions.”