Banks downgrade is another red flag

The downgrade of South Africa’s top banks is another warning sign for the battered South African economy and will result in lending becoming more difficult for already-struggling consumers.

This is according to economists, who said the downgrading of banks followed suit when a country was downgraded.

Moody’s announced on Monday that FirstRand, Nedbank, Standard, Absa and Investec had their creditworthiness cut to one notch above junk status with a negative outlook.

“The primary driver for the rating downgrades is the challenging operating environment in South Africa, characterised by a pronounced economic slowdown, and weakening institutional strength,” Moody’s said.

Insurers Old Mutual, MMI Group, Guardrisk and Standard Insurance were all downgraded one notch to either Baa2 or Baa3 – the lowest investment-grade level.

Economist Mike Schussler said consumers would now find it more difficult to borrow money for things like cars and houses as banks may think twice about lending money.

“It’s just another downgrade. So this is not a good thing. It’s not where we want to be and must get better,” he said.

“This means it will be more difficult for a bank to get money. It will be more expensive and banks will have to be more careful about how they lend it out. This is another warning sign flashing in our economy. Consumer credit growth will be slow.”

Economist Azar Jammine said a country could not have lending institutions with higher credit ratings than the government’s sovereign credit rating.

“It basically happens automatically … it contributes to the reduction of credit,” he said.

On a global scale, Schussler pointed to other countries being downgraded.

“Internationally, there’s a lowered ability to get money. We are in a low yield environment worldwide,” he said. – additional reporting AFP