South Africa rating downgrades could lead to capital outflows: central bank

PRETORIA (Reuters) - Any further ratings downgrade of South Africa could lead to increased capital outflows, the central bank said on Tuesday. Ratings agencies have warned of possible ratings cuts should Pretoria show a lack of commitment to reining in its budget deficit. The warnings came after President Jacob Zuma changed finance ministers twice in less than a week in December, initially replacing Nhlanhla Nene with a little known politician before recalling Pravin Gordhan to the post to calm markets after a run on the rand and bonds. Standard & Poor's and Fitch rate South Africa a notch above sub-investment grade, while Moody's has it two notches above. "The impact of a further ratings downgrade on the South African economy and financial system could manifest in the form of capital outflows (and) potential spillovers to rand-denominated ... government debt," the central bank said in its financial stability review. The bank, which expects growth of 0.8 percent in 2016, said fragile global conditions, weak domestic demand, low commodity prices, a weak rand and the impact of drought had weighed on prospects. The South African financial system faced the challenge of increased risks and uncertainty in the global environment and a deteriorating domestic economic growth and inflation outlook, it added. "Weak global and domestic growth prospects paint a somewhat bleak picture for local employment and high levels of unemployment could hamper the stability of the domestic financial system," the bank said. Deteriorating debt service abilities could impact negatively on banks' asset quality and require them to increase future provisioning for bad loans, weighing on their profitability. But Governor Lesetja Kganyago said South Africa could halt the deterioration of its national debt status if it stayed on the prudent fiscal course set out in its 2016 budget, presented in February. "It is a path that (has) been assessed to be not just credible and robust but is actually a path which if realised will arrest any deterioration of our debt metrics," Kganyago said in remarks after the release of the review. (Reporting by Stella Mapenzauswa; Editing by Mark Trevelyan)