Less Predictable South Africa Policy May See Moody’s Rating Cut

Johannesburg (Capital Markets in Africa) – South Africa’s credit rating may be cut to junk if its policies become “even less predictable” or shift in a way that could undermine the economy, Moody’s Investors Service said.

Policy uncertainty and political turmoil have increased in the last two months as the nation’s anti-graft ombudsman instructed lawmakers to change the central bank’s mandate, the mines minister published new regulations that the industry says undermine investment and President Jacob Zuma’s defeat of a no-confidence motion in parliament weakened the rand. South Africa entered a recession in the first quarter.

“Further delays in growth-enhancing reforms would be suggestive of such a shift,” Moody’s analysts including Zuzana Brixiova said in a credit-opinion report. “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.”

In June, Moody’s cut its assessment on South Africa’s local- and foreign-currency debt to one level above junk after a March cabinet shuffle in which Zuma fired Pravin Gordhan as finance minister. The president’s move prompted S&P Global Ratings and Fitch Ratings Ltd. to cut the nation to sub-investment grade within a week.

Rising Debt
Rating companies are concerned about rising debt and deteriorating governance at state-owned entities such as national carrier South African Airways and power producer Eskom Holdings SOC Ltd., saying that they weigh on the country’s debt assessment.

SAA asked the government for 10 billion rand ($754 million) as part of a recapitalization plan aimed at returning it to profit, Finance Minister Malusi Gigaba said last month. Eskom, which previously received a 23 billion-rand state bailout, will get more government support, he said.

“The future trajectory of the rating will depend on the government’s success in safeguarding South Africa’s institutional, economic and fiscal strength,” Moody’s said.

The rand strengthened 0.4 percent to 13.2659 by 10:30 a.m. in Johannesburg, making it the best-performing major currency against the dollar after Australia’s on Tuesday.

Source: Bloomberg Business News