Sarb will take ‘defensive posture’ to debt downgrade, says Ballim

The chief economist at one of South Africa’s largest commercial bank believes the South African Reserve Bank (Sarb) will take a “defensive posture” in responding to the recent downgrade of the nation’s sovereign debt. But it is unlikely to intervene using either monetary policy or foreign exchange intervention, unless there is a strong impact on inflation.

“Although the rand has depreciated at least 10% against major trading partner currencies in the last two weeks, the pass-through to inflation is low; less than 10%,” Goolam Ballim, group economist for Standard Bank, tells Central Banking.

“The Sarb’s oratory will harden,” Ballim predicts. “Naturally, given the fluidity of the political landscape, the Sarb will be on ultra-vigilance mode.” But Ballim believes any “knee-jerk policy tightening” would be unnecessary.

On April 6, South Africa’s central bank attempted to calm markets after rating agency Standard and Poor’s (S&P) downgraded a number of its commercial banks to sub-investment grade after downgrading South Africa’s credit rating to ‘junk’ status.

In a statement published April 6, the central bank informed the public South African banks remained “adequately capitalised” to deal with the effects of a downgrade. “South African banks were last year subjected to a common scenario stress test, including a macroeconomic scenario that entailed excessive financial market volatility and risk aversion,” the Sarb said.

Banks were able to withstand such an adverse shock, due to the high capital buffers that prevail in the South African banking system, the Sarb added.

Political strife

S&P’s downgrade came a week after president Jacob Zuma made the decision to fire finance minister Pravin Gordhan and his deputy Mcebisi Jonas; Malusi Gigba and Sfiso Buthelezi were appointed in their stead.

Zuma said such changes were needed to “improve efficiency and effectiveness”. “The changes bring some younger MPs and women into the National Executive in order to benefit from their energy, experience and expertise,” he said.

This was the first downgrade made to the African nation’s debt in 17 years.

“The reasons for the deviation are the heightened political and institutional uncertainties that have arisen from the recent changes in executive leadership,” S&P said in a statement.

Barclay’s Africa Group – currently being divested by the UK’s Barclays Group – said the developments leading to the S&P downgrade were “very disappointing”. Up until last week, “the country was building momentum towards better economic growth by the end of this year,” a statement says.

The Barclay’s Africa Group – called Absa in South Africa and operating in a further 10 countries across the continent – acknowledged that the downgrade of South Africa’s sovereign debt would have a “direct impact” on banks that are systemic to the South African economy.

“It takes enormous effort over many years to regain an investment-grade sovereign rating. It is therefore very important that all stakeholders continue to work together,” Absa stated.

Since Zuma’s announcement, the rand has appreciated 8.38%, currently trading at 13.8 to the US dollar.

In 2016, Sarb governor Lesetja Kganyago told Central Banking the central bank did not have the capacity to “manipulate the exchange rate”. “We took a policy position a long time ago to adopt a floating exchange rate that can act as a shock absorber,” he said.

However, the governor stressed that should a depreciating rand feed through to inflation, the central bank would act.

As Ballim notes, inflation has yet to have a significant impact on prices.

Another rating agency, Fitch Ratings, today also downgraded South Africa’s credit rating, citing recent political events would likely result in a change in direction of economic policy. Moody’s Investors Service is currently conducting a downgrade review.

The decision by Fitch and S&P to cut South African debt to junk status is likely to result in its removal from investment-grade investment portfolios, potentially resulting in large investment flows out of the country.

The South African government called the downgrade a “setback”.