South Africa’s central bank says rising fuel and electricity prices posed a domestic risk to the inflation outlook and impact on its 2019 growth.
The apex bank governor, Lesetja Kganyago, gave the remarks on Wednesday after the latest fourth-quarter data showed an annualised growth of 0.8 per cent.
Besides, Kganyago said the impact of the volatile Rand currency and tightening global financial conditions were also being monitored for possible inflationary impacts.
The governor, however, maintained that he expected the economy to grow by 1.7 per cent this year and two per cent in 2020.
Deep and liquid local debt capital markets have reduced the need for South African companies to borrow abroad, making them less vulnerable to a financial crisis than peers in Turkey and other emerging markets, according to Moody’s Investors Service.
Large external financing needs and a plunging currency are proving a toxic mix for Turkey’s corporate sector. But in South Africa, companies have enough access to local funding, and those that have turned to foreign debt used hedging strategies to cushion the effects of short-term currency fluctuations or buy time to adjust to long-term rand weakness, Moody’s said in a report dated 12 September.
In addition, most foreign borrowing by South African companies has been driven by offshore expansion and the debt is serviced with cash flows generated in the same currency, creating a natural hedge to currency weakness, the report said.
“Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies,” Moody’s analysts lead by Dion Bate said in the report. “Despite continued rand volatility, we expect the credit quality of most South African companies we rate to remain broadly stable during the next 12 to 18 months.”
About 38% of South African non-financial corporate debt is denominated in foreign currencies, according to Moody’s. That compares with 56% for Turkey, or an amount of $336bn, almost triple the borrowers’ assets, according to data compiled by Bloomberg. The lira’s 40% slump this year will make servicing those loans more burdensome, lowering capital spending and GDP growth.
Moody’s expects the rand to remain volatile over the next year, driven by how successful the government is in implementing economic reforms, as well as global factors including the US policy path, trade tensions and emerging-market turmoil. That will complicate the operating environment and investment decisions for South African companies, Moody’s said.
Far more conservative and far less leveraged than their global counterparts, South African banks may yet face massive fines from the country’s competition authorities for allegedly manipulating foreign exchange trades.
Barclays Africa, JPMorgan South Africa and Investec Ltd are among the traders in foreign currencies that have “allegedly been directly or indirectly fixing prices in relation to bids, offers and bid-offer spreads in respect of spot, futures and forwards currency trades”, the Competition Commission said in a statement on Tuesday.
Referring to the alleged collusion as the “ZAR domination”, the Commission said it was carried out through electronic messaging platforms used for currency trading, enabling the banks to coordinate their trading activities when quoting customers who buy or sell currencies. “This coordination has the effect of eliminating competition among the Respondents, as it enabled them to charge an agreed price for a specific amount of currency,” the Commission, whose investigation focuses on trade in currency pairs involving the South African rand, explains.
Other banks involved include BNP Paribas; BNP Paribas South Africa; Citigroup Inc.; Citigroup Global Markets (Pty) Ltd; Barclays Bank Plc; JPMorgan Chase & Co; Standard New York Securities Inc. and Standard Chartered Bank.
“Conduct of this nature distorts the price of foreign exchange and artificially inflates the cost of trading in foreign currency paired with the South African rand. Indications are that this conduct was prevalent offshore, but with this investigation we are sending a clear message that we will pursue cartels affecting South Africa wherever they take place,” Competition Commissioner, Tembinkosi Bonakele, said in a statement.
The South African Reserve Bank (Sarb) said it understands that the alleged instances of market misconduct took place in foreign jurisdictions and “do not relate to actions that took place in South Africa”.
“In so far as there are links to South African entities, the Registrar of Banks has been assured by such entities that they will fully cooperate with the investigation of the Competition Commission,” it said in a statement. The Reserve Bank said its recently announced review of local forex trading operations, with the help of the Financial Services Board (FSB), is not informed by any indications of “widespread misconduct”.
Global banks cough up
Forex rigging has come under the spotlight in recent years, with large UK banks paying fines and settlements as a result of their forex traders sharing client orders and trading positions with competitor forex traders.
According to Bloomberg, at the beginning of last year, global regulators began probing evidence that traders at large banks (including JPMorgan Chase, Citigroup, UBS, Barclays and others) were using online chat rooms to share information in order to manipulate forex prices and maximise profit.
More recently, The Telegraph reported that the UK’s Financial Conduct Authority (FCA) is expected to fine Barclays, Royal Bank of Scotland, UBS, JPMorgan and Citigroup in excess of £4 billion (R73.8 billion) for “currency rigging”.
Barclays alone is expected to pay at least £250 million (R4.6 billion), as it chose not to settle with the FCA in November. The group earned more than £5.5 billion in adjusted profit before tax for the 12 months to December 2014.
If these fines provide any indication of the sums the Competition Commission is considering, local banks, which have so far said very little about the probe, could be in for a real hiding.
“Investec will co-operate with the Competition Commission with respect to their investigation. Unfortunately, at this stage we do not have further information with respect to the nature of the investigation and queries should be directed to the Competition Commission directly,” Investec, whose Southern Africa operations earned some £297.4 million (R5.5 billion) for the year to March 2014, said in an emailed statement.
The global specialist bank and asset manager will issue results for the 12 months to March 31 2015 on Thursday.
Bloomberg reported that both Standard Chartered and Barclays Africa said they will cooperate with the investigation, while Standard Bank and JPMorgan declined to comment and Citigroup was not available for immediate comment.