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December 25, 2014 at 06:40 AM
Investors looking for opportunity have flocked to South Africa with the country drawing the most foreign direct investment (FDI) of sub-Saharan African nations, according to Ernst & Young’s “Attractiveness 2014” survey.
But that attractiveness has taken several hits during the course of the year. A five-month strike in the platinum sector, followed by four weeks of inaction at factories, took their toll on the country’s economy.
Then, in August, the failure of African Banks Investments Ltd. led to the downgrade of the country’s debt ratings by Moody’s and Standard & Poor’s. In October, a reduction in South Africa’s growth forecast by the finance ministry added to concerns over the country’s economy.
And in December, Fitch Ratings gave the South African bank sector a negative outlook. Also during the month, the rand was one of the hardest-hit currencies in an emerging market rout—even though the collapse in oil prices should have benefited the country, since South Africa is a net crude importer.
But there are two legislative actions that could have more far-reaching effects on investors in South Africa: a proposed Banks Amendment Bill that followed in the wake of ABIL’s collapse and an expected Investments Bill that will affect bilateral investment treaties.
The Banks Amendment Bill, with its provisions that could strip away some investors’ creditor rights, has caused a backlash among investors, who plan to fight the measure when it goes before the South African Parliament in February. Among the actions the bill would allow, according to its text, is the right for the administrator of a failed lender to “make decisions on behalf of corporate shareholders, in order to avoid additional fetters on his or her ability to perform his or her duties.” The administrator would thus be able to sell assets and change capital structures without consulting investors—something that is not making those investors happy.
The bill has also affected the banks’ ratings by Fitch. According to the ratings agency, while “South African banks are affected by South Africa’s weakening economy, weak expected GDP growth for 2015, and lack of delivery on infrastructure and labor reforms,” the concentration of the banks’ operations in South Africa means that the bbb viability ratings “of Absa Bank Limited (Absa Bank), FirstRand Bank Limited (FirstRand), Nedbank Limited (Nedbank) and Standard Bank of South Africa (SBSA) and their relevant rated holding companies are effectively capped at this rating level by the operating environment.”
Investec, on the other hand, while it is bbb-, is “not constrained at this rating level.”
Fitch said in research that it believes South Africa’s “propensity to support banks is reducing with the impending adoption of resolution legislation. However, a moderate likelihood of support for systemically important banks will remain. Our approach to factoring in state support for systemically important banks does not change despite the African Bank Investments’ resolution. A revision of the banks’ Support Rating Floors (SRF) would have no impact on their IDRs [issuer default ratings] given the current level of their VRs.”
