“We now expect the economy to shrink by 4.5% in 2020, partly due to a $29.3 billion (ZAR 500 billion) budget,” said Samira Mensah, credit analyst at S&P Global Ratings. In a new report recently released, the rating agency said it lowered the country’s foreign currency ratings from BB to BB- in April 2020.
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The economic sector in South Africa is in turmoil
The agency’s forecasts showed that the situation has worsened: “The budget deficit will reach 13.3% of GDP in 2020 due to lower tax revenues, already high budget expenditures in February 2020 and the COVID-19 support program,” Ms Mensah added.
The agency’s forecast for the South African banking sector is commensurate with the economic challenges ahead. “We expect the banking sector to contract as a result of the economic crisis and predict that credit to the private sector will decline by around 5% in 2020. We expect credit losses in the banking sector to increase to about 1.2% in 2020, mainly due to defaults on loans to individuals and small and medium-sized enterprises.”
S&P Global Ratings believes the financial sector will be offered stability by the liquidity measures taken by the Reserve Bank of South Africa
Nevertheless, noted S&P, the South African Reserve Bank’s liquidity measures will ensure the stability of the financial and banking sectors. “We downgraded our ratings on leading South African banks to “BB-” in early May 2020, but their standalone credit profiles remain at “bbb-“.
In addition, although insurance claims may increase due to COVID-19, S&P does not expect the losses to be significant. “Massive equity market sales and increased credit risk will likely put pressure on insurers’ earnings, but we do not expect this to significantly affect their capital levels,” analysts continued.
Insurers benefit from the support of significant capital backing commensurate with their risks and high liquidity. The local risk-based solvency regime has also encouraged insurers to improve their risk management practices. As a result, the solvency of the insurance sector is stronger than that of most other domestic sectors. “We are capping our global ratings on insurers to ‘BB’ ratings in local currency for South Africa,” the agency concluded.
The COVID-19 pandemic affected all economic sectors
The resilience of the corporate sector at COVID-19 reflects country-specific government measures and the response of consumers and businesses. Containment measures have affected transportation companies and retailers, particularly due to reduced customer activity.
Utilities (telecom, electricity, water and infrastructure) are more resilient, but the outlook for demand and accessibility is uncertain. Rating changes in the corporate sector reflect the extent of government support for state-owned enterprises; constraints on the ability to rate specific companies above the sovereign; and the compression of ratings at the national level, with a large proportion of national ratings being grouped into two or three rating levels.
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First published in Financial Afrik, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.
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