A more challenging year for South Africa's banks in 2020
|Published
JOHANNESBURG – Fitch Ratings has downgraded the long-term issuer default ratings (IDRs) and viability ratings (VRs) of five South African banks – Absa, FirstRand, Investec, Nedbank and Standard Bank – to "BB" and "bb", respectively. The Outlook on all the IDRs is negative. Capitec Bank as a developing bank, mainly focusing on basic retail banking was not downgraded.
All South African banks will continue to operate.
Fitch has taken similar rating actions on the long-term IDRs and VRs of four South African bank holding companies, namely Absa Group, Investec, Nedbank Group and Standard Bank Group. All national long-term ratings and debt ratings (where applicable) have also been downgraded. The outlook on the national long-term ratings is revised to negative from stable.
Fitch believes that the South African operating environment is particularly exposed to the Covid-19 pandemic because of its highly dense and vulnerable communities, and heightened macro-economic risk from falling commodity prices, disruption to tourism, mining activity and manufacturing, as well as pressure on the country's public finances.
South African public and private sectors need to have a national vision to address the economic challenge of unemployment, poverty and inequality. Restructuring the economy and building an equal society 25 years after democracy will benefit the country with an expanded future economy. This period continues to force South Africa to reflect on the disunity and misalignment of vision between government and corporate South Africa. Restructuring the economy is a solution for South Africa to address unemployment, poverty and inequality.
Fitch expects South African banks to face multiple challenges in the near team, including a decline in client activity, lower interest rates, which will put pressure on margins, and rising credit losses. These factors will increase risks to banks' earnings, asset quality and capitalisation. Debt-relief measures announced by banks will not only affect margins but also mask the extent of asset-quality deterioration.
The SA Reserve Bank (SARB) recently cut the repo rate by 100 basis points to 5.25 percent and announced a range of additional liquidity support measures, including government bond purchases in the secondary market, to increase market liquidity.
SARB is likely to cut the repo rate in the next Monetary Policy Committee meeting after the markets 2020 first term results and as part of protecting the economy, further relaxation of bank rules to ensure the flow of credit into the economy is possible. The 2020 economic forecasts risks are higher than what all institutional investors and global economists predicted. Investors will have lower returns than the expected interest rate of returns in the majority of sectors and better to those who applied derisking models that protect assets over the global financial crisis.
Miyelani Mkhabela says South African public and private sectors need to have a national vision to address the economic challenge of unemployment, poverty and inequality. Photo: Supplied
The global purchasing managers index is portraying red flags, global transport systems are limited, lockdown at major economies has worsened chances for an official global recession. OPEC nations are expected to overlook markets high profits and have a reasonable oil price to reduce the impact of 2020 expected recession, as that will cause crisis developing and emerging markets such as South Africa and high inflation for main products that we import from our global trade partners.
Rating agencies and institutional investors are in agreement that the socio-economic features in South Africa including structurally high unemployment and income and wealth inequality are longstanding and deeply entrenched constraints on the country's growth potential. While also South Africa's income inequality is among the highest globally, as measured by the Gini index. South African corporates have not enough alternatives other than putting solving poverty and inequality as their core impact investment assessment outcome and while on the other hand, our local pension funds must focus on allocating funds to projects that will expand the economy to redress the economic faults we have as a nation.
Pension funds and trade unions have the power to set measures that will enable economic development, transformation, competitiveness and the desired outcome of Gross National Happiness. Contradictions in the South African economy are that, at the current trajectory, when our economy grows even with three percent, the growth will benefit few stakeholders and causing inequality to be worsened. Our priority is to restructure the economy first, and have an economy that will grow for all people to experience shared growth and value. Stakeholder capitalism is viewed as a better principle to be adopted by all nations as discussed at the World Economic Forum 2020, Davos, and South African business leaders attended the conference.
Time to think for the country's public and private sector and reflects on the future of South Africa this generation of leaders will navigate. The South African value of vision will be to create a resilient economy; a great nation of people of faith; Reflective Leadership; leading the people out of poverty and inequality; leading South Africans to the “Dream South Africa”; building great values so that we don’t lose our past achievements; train more leaders to lead municipalities, corporates and National Government; regaining conviction and credibility.
What needs to be done:
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Quantitative easing is a solution for transforming the South African economy
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A Further 100 basis points cut by the SA Reserve Bank
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Commercial Banks needs to provide revised repayments solutions for small businesses and workers
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The logistics industry and retailers need to lock prices unchanged to reduce a future crisis
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A clear vision to restructure the South African economy
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Tightening business continuity management systems during the lockdown
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Churches must pray for the nation during the Easter holidays
Growth occurs when vision and values match between public and private sector.
Miyelani Mkhabela is an Economic Strategist and Director at Antswisa Transaction Advisory Services, contactable at: antswisa@gmail.com / antswisa@antswisa.co.za / +27 61 4433 199