Ratings agency Moody’s on Friday lowered its outlook for the South African banking system to negative from stable, citing deteriorating operating conditions over the next 18 months, sending shares across the sector lower.

Africa’s most advanced economy is expected to grow less than 1% this year, hobbled by low commodity prices, drought and political ructions that have unnerved investors.

As of 1.38pm GMT, shares in Barclays Africa were down 2.2%, Standard Bank had shed 1.08% and Investec was 0.5% lower.

“The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months,” it was noted in the annual banking system outlook.

“The challenging economic outlook will strain borrowers’ repayment capacity, fuelling increased asset risks.”

Moody’s earlier this month kept SA’s sovereign rating on hold at Baa2 with a negative outlook, two notches above junk.

The ratings agency said it expected the banking system’s nonperforming loan ratio to rise to about 4% by the end of 2017 from 3.1% in December 2015, due to pressure on corporates and consumers from rising interest rates and inflation.

It also said profitability in the sector could come under strain due to waning demand for credit and lower business opportunities.

Fellow ratings agency Fitch, which has SA at one notch above speculative grade, said on Thursday the country’s authorities should avoid populist measures such as introducing a minimum wage in the run-up to local elections in August.

Standard & Poor’s also rates SA’s debt at BBB-, one notch above speculative grade and with a negative outlook.

“We have expected the lower outlook for a while,” said Graeme Korner, director at fund manager Korner Perspective, which invests in banks.

“We think the earnings of the banks will be okay in spite of these concerns because the fact is South African banks are very good value and pay good dividends.” (Reuters)