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Moody’s follows suit with ratings downgrade

By Jessica Anne Wood

Ratings agency Moody’s is the latest to downgrade South Africa’s long-term issuer and senior unsecured ratings. This follows downgrades by Standard & Poor’s and Fitch earlier this year. However, unlike the other two ratings agencies, Moody’s still has South Africa one notch above sub-investment grade. The downgrades follow a number of political and economy issues the country has faced in recent months, including the cabinet reshuffle by President Jacob Zuma.

Among the key drivers for the credit ratings downgrade according to Moody’s were:

  • The weakening of South Africa's institutional framework.
  • Reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms.
  • The continued erosion of fiscal strength due to rising public debt and contingent liabilities.

“The downgrade reflects Moody's view that recent political developments suggest a weakening of the country's institutional strength which casts doubt over the strength and sustainability of the recovery in growth and the stabilisation of the debt-to-GDP ratio over the near-term,” said Moody’s.

The ratings agency added: “The negative outlook reflects Moody's view that the risks to growth and fiscal strength arising from the political outlook are tilted to the downside. It is unlikely that a political consensus will emerge which supports investment in the economy and reinvigorates the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the government's balance sheet. The opposite scenario, of heightened political dysfunction, continued gradual institutional weakening and diminished clarity over policy objectives, has a higher likelihood.”

Reactions to the downgrade

According to Prof Raymond Parsons, an economist at the NWU School of Business and Governance, Moody’s latest decision regarding the country’s investment rating should be seen as a warning. “As expected Moody's have reduced SA's investment rating by one notch - keeping it at investment grade, but just above junk status and retaining a 'negative outlook'.”

Parsons highlighted that a positive of the downgrade is that the country is still in the global bond index, which impacts on borrowing costs for South Africa. “This grants SA a breathing space and gives scope for remedial policies and actions. Yet the continued negative outlook categorization and Moody's critical but balanced narrative means that their decision should not be viewed as a reprieve, but rather as a warning for SA to get its house in order. Moody's sees the risks to growth and fiscal strength associated with the political outlook as now being tilted to the downside,” clarified Parsons.

The Democratic Alliance (DA) said that Moody’s ratings decision “is a clear vote of no confidence in finance minister Malusi Gigaba and President Jacob Zuma.”

David Maynier, DA Shadow Minister of Finance, noted that the party has written to Speaker of the National Assembly, Baleka Mbete, calling for a debate on measures that can be taken to combat the recession, ratings downgrades and mass unemployment in South Africa.

The future outlook

Moody’s pointed out: “The future trajectory of the rating will depend on the government's success in safeguarding South Africa's institutional, economic and fiscal strength. Indications that the strength and independence of the country's institutions have diminished to a greater extent than in Moody's baseline scenario, or that the emerging policy framework has become even less predictable or has shifted in a way likely to undermine economic or fiscal strength, could lead to a further downgrade. Further delays in growth enhancing reforms would be suggestive of such a shift. Downward pressure could also develop if liquidity pressures begin to re-emerge at state-owned enterprises that would elicit pronounced government intervention, be it through the activation of guarantees or other measures.”

“Conversely, Moody's could change the rating outlook from negative to stable if the government were to deliver on commitments that indicated the continued independence and strong policy-making capabilities of South Africa's policy institutions, and which enhanced medium-term growth and achieved the planned stabilisation in the government's debt burden. A decline in the value of guarantees to state-owned enterprises would also be credit positive,” highlighted Moody’s.

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