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."