Rising public debt levels affect a country’s banking sector, as this crowds out the private sector - with banks preferring to lend to government, which is seen as lower risk, Moody’s senior vice president Constantinos Kypreos has said.
Kypreos explained that tightening global financial conditions are putting pressure on the sector, while banking penetration in Africa remains low and the potential is there for the banking sector to support economies.
Asset quality and foreign currency liquidity are of concern for banks on the continent, said Kypreos, adding that "it might not be visible in South Africa because it’s a rand economy, but many, if not most of African countries, are highly dollarised."
He told delegates to the Deloitte Africa outlook conference on Thursday that many banks in sub-Saharan Africa were constrained by size, and unable to fund large projects such as infrastructure.
The ratings agency upgraded its outlook for SA’s banking system from negative to stable in June 2018, while all seven banks it rates in the country remain below investment grade at Baa3.
In a report on sub-Saharan Africa this week, Moody’s said it expected government debt ratios to deteriorate only marginally or stabilise in 2019, reflecting ongoing fiscal consolidation and the positive impact of higher growth rates on the denominator of debt to GDP.
While Kypreos focuses on the banking sector and could not comment on the sovereign (country) rating, the decision by the ratings agency - expected towards the end of March - will be closely watched.
Moody’s is the only one of the three major ratings agencies to still hold government’s debt at investment grade. If the ratings agency downgrades SA, the country will be removed from the Citi World Government Bond Index, triggering a multi-billion-rand capital flight.
Investec Bank’s chief economist Annabel Bishop, speaking at the same event, said if February’s budget speech were poorly received, Moody’s is likely to change its outlook from stable to negative and not immediately downgrade SA.
"We do see 2019 as a better year for SA, see a much brighter outlook for the economy, we see the economic growth rate at 1.7% almost tripling what 2018 is likely to be …at 0.6%, so we’re hoping that we do continue to see the good governance," Bishop said.
She said, however, that there had been a "tremendous escalation" in government debt in recent years, and government had fallen into a debt trap in some aspects, borrowing money to service interest costs. "We’re in a fairly negative fiscal space", Bishop added.
Despite the fiscal deficit not being seen as extreme, Bishop said that risks remained and state-owned entities, including Eskom debt, "could push [SA] over the edge".
She advised government to cut back on expenditure, such as the public sector wage bill, to free up money for infrastructure spend and fixed investment.
Finance Minister Tito Mboweni will table his maiden budget speech on February 20. His Medium-Term Budget Policy Statement in October said SA was at a "crossroads", with weak economic growth and a higher-than-expected tax collection gap. He increased the budget deficit for 2018/2019 to 4%, with government debt rising to 55.8% of gross domestic product.