Moody's sees SA in recession, outlook for banking system negative

Ratings agency Moody's foresees the South African economy going into recession and the gross domestic product (GDP) contracting 6.5% in real terms in 2020.

This is as a result of long-standing structural challenges and the severe hit to economic activity caused by the coronavirus, Constantinos Kypreos, senior vice president at Moody’s Investors Service, said in a banking system outlook update released on Monday.
 
He foresees that the temporary lockdown of the country will reduce production and cut household consumption. Furthermore, he foresees that the transport, hospitality, mining and manufacturing industries will be particularly hard hit.

SA banking system

Moody's expects a material deterioration in the credit risk exposure of South African banks.

The ratings agency has changed its outlook for the South African banking system to negative from stable, it said on Monday.

This reflects Moody's assessment that disruption caused by the coronavirus (Covid-19) outbreak will exacerbate what it calls "the already challenging operating conditions" in the country.

It foresees that the fallout from the coronavirus outbreak will weaken the credit worthiness of South African banks by hurting loan performance and profitability and severely hampering business growth.

Moody's does, however, acknowledge that government's fiscal package and regulatory measures to ensure adequate liquidity in money and government bond markets and loosening of capital requirements to free capital for on-lending by banks will provide some support.

Other points highlighted on the banking system:

  • Loan performance will deteriorate materially, with problem loans increasing;
  • Capital ratios will reduce as credit risk increases. The banks' holdings of government securities at around 150% of their equity as of December 2019, represent a higher credit risk following the recent downgrade of the government credit rating to non-investment grade;
  • Profitability will weaken as a decline in client activity will weaken banks' total revenue. Lower client activity will also affect fee income;
  • Funding and liquidity profiles will remain stable. Banks will continue to be predominantly funded by domestic deposits with a low reliance on foreign-currency funding, which helps insulate South African banks' funding profiles from volatility in global capital markets;
  • Low probability of government support, with no rating uplift for the banks. The government's capacity to support banks is limited, given its fiscal challenges.

* Compiled by Carin Smith

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