We find ourselves in a macroeconomic environment with high systemic risk, a lot of uncertainty and skittish financial flows with the potential to threaten financial stability.
All the central banks have put in liquidity backstops, even in South Africa, to ensure that the financial plumbing in the short term is functional and that panic eases. South Africa’s two rating downgrades feed into the baking system. It hampers our ability to raise money in the markets, particularly on the dollar side, which has become far more expensive now that we’re speculative grade.
While the central bank has tried to offer relief on capital and liquidity, rating migration risk results in pricing for credit in the market that has higher spreads. While baseline rates might be coming down because of easing financial conditions, we are still concerned about the pace of credit and money supply going into the economy to generate growth. In this scenario, we would expect that we will start to see in the next six to 12 months rating downgrades on corporates based on lower earnings, access to liquidity in the markets and higher cost of capital.
The drivers of credit deterioration over the last 12-18 months are still in play and the inability to implement reforms still weighs on us. The credit outlook is still very negative on the sovereign side. In March we had net outflows of about $3.6 billion. Because the passive money is now out, South Africa has to fight like every other emerging market for a dwindling amount of USD liquidity. We have to tell a story that we are willing to be reformist and have fiscal discipline, which should help to flatten the curve and fund this deficit, and lower the cost of capital in the economy in the medium to long run.