Reserve Bank sees rising risk of downgrade to junk
bdlive.co.za - Apr 5th 2016, 10:49
The risks of SA’s credit rating being downgraded had increased, but how the rand would react to a downgrade was uncertain, Reserve Bank deputy governor Daniel Mminele said on Monday night.
Ratings agencies Fitch and Standard & Poor’s will review SA’s credit ratings in two months’ time and both agencies have SA just one level above sub-investment grade, or junk status.
"The risks of a downgrade have definitely increased," Mr Mminele said. "So, an element would be priced in already, but how much more of a reaction one might have at the time (of a downgrade) is not so clear. There could be … a little bit of a knee-jerk reaction when that actually happens."
The Bank released its monetary policy review on Monday at a forum in which the monetary policy committee engaged members of the public.
In a section on credit ratings in the review, the Bank noted that a downgrade of SA’s credit ratings to junk, would probably raise short-term rates by 80 basis points, while long-term bond yields would probably lift by a larger magnitude of 104 basis points.
Higher borrowing costs would have several negative effects: more government spending would go to debt-service costs, the private sector’s costs of investment would rise, and the rand would probably depreciate — exacerbating inflationary pressures, the Bank said.
Bank governor Lesetja Kganyago said, "SA does not have political instability at the moment, but political developments do affect financial markets."
Mr Kganyago said the Bank’s inflation outlook was worrying.
The review — an account of recent developments in monetary policy — said rising inflation made it necessary for SA to raise interest rates despite weak economic growth, as leaving inflation unchecked would only result in larger rate hikes in future.
"Tolerating additional inflation in the short run could require larger interest rate adjustments later, with proportionally greater costs for the economy," the Bank said.
The weak rand and higher food prices had caused a "marked deterioration" in the Bank’s inflation forecast, it said in the review, adding that rand weakness remained an inflation concern.
"This persistent and substantial rand depreciation is expected to generate higher inflation over the forecast period," it said.
The Bank raised rates by 50 basis points in January and by 25 basis points in March on rising inflation concerns. It forecasts inflation to average 6.6% this year and 6.4% next year.
"Monetary policy can accommodate temporary shocks that cause target breaches, but should respond if those shocks risk leaving inflation permanently higher, beyond the target range," it said.
Local prices were increasing fast because of a weak rand as well as shocks such as drought-related food price spikes and regular large increases in electricity prices.From DFM Publishers (Pty) Ltd
Fitch sceptical SA can return to fiscal health
27/10/2017 - 10:42
Fitch, the first credit-ratings agency to issue an opinion on Wednesday’s medium-term budget statement, expressed strong scepticism on Thursday that SA could return to a path of fiscal consolidation, raising fear of a downgrade even before the ANC’s elective conference.
Reserve Bank treads carefully as risks to inflation outlook threaten
25/09/2017 - 08:44
The Reserve Bank disappointed the markets on Thursday by failing to cut the repo rate, noting that a number of risks to the inflation outlook had increased amid heightened uncertainty.
Falling exports take their toll on SA’s current account deficit
09/12/2016 - 12:07
SA’s current account deficit widened more than expected in the third quarter, as the value and volume of exports fell amid weaker output data from the productive sectors of the economy.
Retailers make inroads into the African market
01/12/2016 - 09:17
While African economies have suffered some setbacks as a result of a weakened global economy, the continent is still attractive in the long term.
2016 a particularly disruptive year for entrepreneurial landscape
21/11/2016 - 10:37
Many local entrepreneurial businesses have the potential to thrive under pressure. However, in the midst of a volatile economy small and medium enterprises (SMEs) do require a particular level of certainty to flourish and implement growth strategies.