In the beginning of April, Moody’s Investors Service (“Moody’s”), Fitch Ratings, and S&P Global Ratings (“S&P”) downgraded the five largest banks in South Africa. The five banks are:
- The Standard Bank of South Africa Limited
- FirstRand Bank Limited
- ABSA Bank Limited
- Nedbank Limited
- Investec Bank Ltd
The outlook on each bank’s long-term deposit rating remains negative.
Primary Drivers Behind the Ratings
Moody’s reported that the primary driver for the rating action is due to the increasingly difficult operating environment for banks in South Africa. The secondary driver for the rating action is the weakening credit profile of the South African government given banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their prudential liquidity requirements, which links their credit profiles to that of the government.
Fitch Ratings cited a deteriorating operating environment following the outbreak of the novel coronavirus, which has already devastated the nation’s economy as the rand emerges as the worst performing emerging market currencies.
S&P reported that the Banks’ ratings reflect on South Africa, which was downgraded after President Jacob Zuma fired the country’s finance minister and made other executive changes, impacting the country’s fiscal and growth outcomes.
2020 Negative Outlook
Moody’s expects there to be unprecedented deterioration in the global economic outlook caused by the rapid spread of the coronavirus outbreak, which will exacerbate South Africa’s economic and fiscal challenges, complicate the emergence of effective policy responses, and negatively impact banks’ credit profiles through asset quality, profitability and liquidity pressures.
Fitch Ratings forecasts South African banks to face multiple challenges in the near team, including a decline in client activity, lower interest rates, which will put pressure on margins, and rising credit losses. These factors will increase risks to banks’ earnings, asset quality and capitalization. Debt-relief measures announced by banks will not only affect margins but also mask the extent of asset-quality deterioration.
Notably, Fitch had already anticipated a more challenging year for banks in 2020 before the Coronavirus pandemic – as reflected in its Negative 2020 sector outlook – mainly due to weak GDP growth. However, they now state that their, “expectations of earnings and asset-quality weakening for 2020 now far exceed what was contemplated in late 2019 when we published our outlook”.
Even more, at the start of April 2020, the rand fell to its weakest level on record against the Dollar (Bloomberg), with a forecast to drop 5.8% against the dollar this week. With stagnant growth, low inflation, relatively high rates, and growing consensus among investors, the South African economy will likely struggle for some time, with the rand likely to grow weaker before it recovers.
Opportunity to Protect Hard-Earned Rands
The South African rand has always been a vulnerable and volatile currency. One of the ways a South African can protect his or her wealth is by investing abroad in a currency that enjoys less volatility (erratic and unpredictable fluctuations) and more stability. The American dollar is often looked favorably as a ‘shelter’ among South African investors and one way for South Africans to expose themselves to the US dollar is through the investment of local real estate through the EB-5 visa program.
The EB-5 Program is an immigrant investor visa program created by the United States Congress in 1990 that allows eligible immigrant investors to become lawful permanent citizens by investing a minimum required amount into a designated project and that project creates a minimum of 10 jobs in the process.
There are many advantages to investing in an EB-5 project but one thing it does offer is protection for investor’s hard-earned money. If one were to invest in a project in the US, the money investment would be in US dollars, effectively hedging currency risk. Further, at the end of the investment term, one would be entitled to receive the investment back in US dollars. At that point, it could be reinvested or converted back to South African Rands – most likely at a very favorable exchange rate as the dollar will likely have appreciated further against the Rand.
More than solely protecting wealth, investors will also be able to obtain residency through EB-5, provided the investor funds the investment legally and creates the required jobs. In fact, America may also be a place where such an investor may consider retiring to or setting up a home or business to further enjoy the same rights as any American citizen, aside from voting and working in a government job.
Overall, the program gives one the opportunity to take control of their destiny as the next turn comes. It will open doors and options for them and their family’s future, while at the same time offering a great hedge against the Rand in times of trouble.
More Resources on this Topic: Coronavirus and Recession – The Impact on the South African Rand
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