Nedbank is “disappointed” by S&P Global’s decision to downgrade South Africa’s local currency sovereign debt ahead of key events such as the ANC’s elective conference in December and the national budget in February next year.While Nedbank welcome Moody’s decision to maintain its investment-grade rating of South Africa’s
government debt for now, it notes its concerns about weaker economic growth prospects and government’s deteriorating financial position.
government debt for now, it notes its concerns about weaker economic growth prospects and government’s deteriorating financial position.
“We have a very short window to change the outlook for the economy, and decisive action is required to prevent further downgrades next year,” says Nedbank Group Chief Executive Mike Brown. “We urgently need to accelerate economic growth, which will require policy clarity, structural reforms and restored faith in governance in order to lead a recovery of consumer and business confidence.”
Nedbank says it has been aware of the risk of sovereign downgrades for some time and is well- prepared to manage any resulting impact. “Nedbank is one of the largest banks in South Africa and is well-capitalised with a diverse funding base.”
The bank adds that South Africa benefits from a strong, sophisticated and internationally-integrated financial services sector with high standards of governance and regulation. “The system proved its resilience during the global financial crisis, and will do so again.”
Nedbank notes that both agencies commented on the importance of maintaining the integrity of institutions like the South African Reserve Bank and National Treasury, which is critical to ensuring that the financial sector is resilient and capable of supporting a recovery of the economy.
However, despite this resilience, the bank says that the downgrade is a blow for South Africa and it could and should have been avoided.
“It will become more expensive for government and private sector to raise funding. Foreign investor demand for South African debt will be weakened, which will be negative for the exchange rate. There will also be upward pressure on inflation and domestic interest rates.”
Brown adds: “While we are confident that Nedbank is well positioned to manage the impacts of ratings downgrades, they represent another setback to our country, and as a result all
South Africans will on average be poorer. Economic growth will be lower and unemployment is expected to be higher. It will be more expensive for government to borrow money, meaning that more of our resources will be spent on servicing debt and less available for important areas like infrastructure, education, healthcare, housing and social needs.”
South Africans will on average be poorer. Economic growth will be lower and unemployment is expected to be higher. It will be more expensive for government to borrow money, meaning that more of our resources will be spent on servicing debt and less available for important areas like infrastructure, education, healthcare, housing and social needs.”
The bank says that while it will ensure that it manages the effects of the downgrade on its business and stakeholders, it will also continue to work with the public sector and civil society to restore confidence in the economy.
“Alongside partners in the CEO Initiative and other structures, we have worked hard to support employment and the development of SMEs. Through such partnerships, we can improve governance of institutions across South African society, and the outlook for the economy and the country’s credit ratings can recover,” says Brown.
The most tangible impact of the downgrade will be an increase in the cost of borrowing as the cost of capital increases.
“Bank credit ratings are expected to be downgraded as they are ‘capped at the sovereign ceiling’, so any reduction in the sovereign rating will automatically translate into a reduction in bank ratings.”
Brown notes: “Our strong balance sheet management enables Nedbank to weather any economic volatility that may arise.”
To mitigate the impact of the downgrades, Nedbank has ensured that its lending policies and coverage ratios are appropriate in a more difficult economic environment.
“Nedbank maintains high levels of capital close to or above the top-end of our target ranges. We have a high level of endowment funding that should increase net interest income if interest rates were to rise, high levels of high quality liquid assets, and an appropriately diversified term funding profile.
Although the downgrade can be expected to put further pressure on the rand, we do not anticipate this pressure to impact our overall funding position.”
Although the downgrade can be expected to put further pressure on the rand, we do not anticipate this pressure to impact our overall funding position.”
Nedbank says it employs low levels of foreign funding, with only around 7% of its total funding base from foreign sources. The bulk of Nedbank’s foreign funding is matched by foreign-denominated assets and, therefore, the bank is not exposed to foreign exchange risk or liquidity risk on these matched positions.
Nedbank adds that it has no need for any additional debt capital market funding in 2017, as it has completed its debt capital markets issuances and/or redemptions for the year.
“These strategies were front-loaded in 2017 given our concern about the likelihood of a downgrade. In total only about 8% of our funding is raised in capital/bond markets.”
Brown emphasises: “Our country urgently requires ethical and inspirational leadership by government, business and labour that puts the interests of South Africa above personal or factional interests. The February budget statement is South Africa’s last chance to demonstrate the structural reforms and fiscal consolidation that are required to improve economic growth prospects and prevent Moody’s from also downgrading the local currency debt to below investment grade, and as a result triggering the exit of our local currency debt from important global bond indices.”
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