Cape Town – The downgrading of South African banks by Fitch will lead to an increase in their lending rates, according to economist Mike Schussler.
Fitch cut the credit ratings of FirstRand, Nedbank, Standard Bank and Absa in the wake of downgrading South Africa’s debt to one notch above junk status.
Normally when there is an upgrade or a downgrade of a sovereign credit then banks usually follow suit in a couple of weeks.
Schussler told Fin24 this drop in ratings usually follows between 4 to 6 weeks, but the recalling of Nhlanhla Nene as finance minister may have speeded up this process.
“The poor banks were caught in the middle and some of their customers are worse off than before and interest rates are now likely to increase making other customers more likely to default as well.”
He said it bad time for banks with the country battling drought, low commodity prices, credit rating downgrades and market uncertainty.
“Remember too that via our pension funds we are major shareholders of banks and we have seen their value decline – partly due to the fact that the market understood that some decline in their rating was likely to happen and the added uncertainty that the new minister of finance brought.”
While banks always ask a margin above prime for almost all interest rates to the consumer, Schussler said this margin may have to increase as they get finance at higher costs.
“Long term government bond interest rates put us in the same space as junk rated countries. The money government needs to borrow has increased substantially and that is going to hurt the average tax payer.”
Schussler said this is a huge problem for all South Africans as a weaker rand hurts all and higher rates hurt businesses and borrowers and increase the cost of doing business in South Africa.
“This is a serious blow and the rating agencies are actually only doing their job of informing others such as other banks and pension funds that we are no longer as good as we were.
“Every man and woman in SA has lost in the face of higher costs; lower pensions; lower income as a result of higher taxes coming and less government money to deliver services,” he said.
JSE CEO Nicky Newton-King warned on Sunday in a statement that the falling rand will hit us hard.
The currency devalued from R14.53 to R15.89 (9.36%) against the US dollar and from R15.94 to R17.45 (9.47%) against the euro in the two days following Nene’s axing.
“Continued currency depreciation will have a profound impact on fuel prices and on inflation overall, which will hurt companies, small businesses, and individuals,” she cautioned.
“This will put pressure on the ability of people to fund their health and housing requirements, their household budgets, their children’s education and their entrepreneurial aspirations.”
Meanwhile; in statement on Sunday, JSE CEO Nicky Newton-King warned that the plunge in the value of investments on the JSE in the two days after President Jacob Zuma announced he was replacing finance minister Nhlanhla Nene will have a longer term effect on the stability of the economy.
She said individuals and corporates should be aware of the seriousness of this moment, “and take accountability for how we respond”.
Ms Newton-King’s statement coincided with Sunday newspaper advertisements taken by Business Leadership SA, which represents 78 of SA’s biggest companies and multinationals, in which it said SA could ill-afford to score “own goals” while tackling problems like high unemployment, below-target economic growth and the increasing cost of servicing national debt.
“In this context the replacement of an effective and trusted finance minister just 18 months into his term of office has raised doubts about our ability to maintain prudent macro-economic policies,” BLSA said.
The JSE handled unprecedented volumes on Thursday and Friday. Average daily value traded in equities was R47.8bn, more than double the average of R19.9bn a day in the year to date. The FTSE/JSE financial 15 index fell 13.36%, the FTSE/JSE banks index dropped 18.54% and the FTSE/JSE all-share index shed 2.94%. The market capitalisation of the whole JSE went down by 1.49% to R11.18 trillion, a loss of R169.6bn.
The benchmark government bond, the R186, which was trading on a yield of 8.66% at the beginning of the week, ended the week at 10.40%.
“Market losses put strain on credit extension and interest rates, and raise borrowing costs for companies and individuals,” Ms Newton-King said.
“As cost of capital becomes more expensive, this in turn constrains the growth stimulus which we desperately need. The outlook for much needed job creation opportunities diminishes. And higher lending rates make everyday life more expensive for ordinary South Africans.
“Continued currency depreciation will have a profound impact on fuel prices and on inflation overall, which will hurt companies, small businesses, and individuals.”
ANC veteran Barbara Hogan on Friday said President Jacob Zuma crossed the line and any ANC member worth his or her salt needs to speak out.
Zuma on Friday spoke out on the recalling of Nhlanhla Nene as finance minister, saying his name had been put forward to head the African Regional Centre of the New Development Bank/Brics Bank.
“I certainly believe that if ANC members are worth their salt, they have to start looking very carefully and introspectively… about our roles in this organisation and what we are giving consent to by allowing this president to operate as though he is completely unaccountable,” she told News24.
“They [the ANC] need to hold this president, who has become a law unto himself, [to account]. If they do not want to recall him, then they must hold him accountable.”
Ms Hogan, a former minister and wife of ANC veteran Ahmed Kathrada, was speaking out following the axing of Finance Minister Nhlanhla Nene.
Ms Hogan has been Minister of Health and Minister of Public Enterprise. She was fired as Public Enterprise Minister by Mr Zuma in 2010.
She called Mr Nene’s dismissal an arbitrary act and said it was unacceptable that Mr Zuma had not given an explanation for his decision.
“We all know there is not an acceptable explanation.
“This is the final straw. If the president is now intent on dismantling Treasury anyone who has been in government knows that a lot of government revolves around a treasury.”
The president had gone beyond what was acceptable, she said.
Zuma ‘has to be held to account’
Ms Hogan praised Mr Nene as a man who had worked his way through the ranks and was respected.
“If you want to talk about black empowerment, let’s just talk about Mr Nene.
“That is the most remarkable example of a man who came to Parliament, put his mind to it and grew in stature… and applied his mind.”
Ms Hogan said the president had a constitutional right to appoint and remove Cabinet ministers, but under the current climate, when the economy was facing the worst disaster in 20 years, he had to explain what he was doing.
Under Mr Zuma the country had seen the disillusion of its democracy with institutions like the Public Protector, the National Prosecuting Authority and the SA Revenue Service being wrecked.
Ms Hogan called on all ANC members to speak out.
“I’m talking about each and every good thinking ANC member… disregard this notion that you can talk only within the structures and that you can talk only in private.
“Luthuli House needs to hear loud and clear that this man has to be held to account and we need people, men and women of good standing and stature, to do that job.” – News 24 and BusinessDay