Moody’s places South Africa’s Baa2 ratings on review for downgrade

Johannesburg, South Africa, Capital Markets in Africa — Moody’s Investors Service has today placed the Baa2 bond and issuer ratings of the government of South Africa on review for downgrade. Also placed on review for downgrade were South Africa’s (P)Baa2/(P)P-2 shelf and MTN program ratings.

The decision to place the ratings on review was prompted by the continuing rise in risks to the country’s medium-term economic prospects and to its fiscal strength, notwithstanding the tighter fiscal stance undertaken in the 2016/17 budget. The review will allow Moody’s to assess to what extent government policy can stabilize the economy and restore fiscal strength in the face of heightened domestic and international market volatility.

In a related rating action, Moody’s has also placed on review for downgrade the Baa2 rating of the ZAR Sovereign Capital Fund Propriety Limited, which is fully and unconditionally guaranteed by the Republic of South Africa.

Moody’s cited South Africa’s weak economic performance as a risk factor when assigning a negative outlook to the rating in December 2015.  It stated:

“We noted then that the economy was vulnerable to further adverse global, regional, domestic and financial market dynamics, with concomitant negative implications for government revenues, the fiscal balance and the government’s debt burden. Last year’s growth dropped to 1.3%, the slowest pace since the 2009 global financial crisis.”

Furthermore, Moody’s assess whether government policy is likely to lead to a reversal in the continuing erosion of the government’s balance sheet. Over the last several years, South Africa has experienced a series of external shocks and adverse domestic developments (including lower than forecast growth, but also large public sector wage hikes) that have progressively weakened the government’s balance sheet.

The worsening debt dynamic was another factor noted when assigning a negative outlook to the rating in December 2015, Moody’s stated.  The rating agency further said, as with growth, the debt position has continued to deteriorate, even if only slightly. Despite the government’s adherence to expenditure ceilings in recent years, adverse growth and revenue dynamics have resulted in debt to GDP (excluding guarantees) increasing to 50% of GDP this fiscal year from a trough of 26.5% in March 2009. The deterioration in key fiscal and debt metrics has rendered the country’s public finances increasingly vulnerable to negative shocks.

Moody’s said it will examine the likelihood of the recently announced 2016/17 budget and medium term expenditure framework being implemented as intended, and achieving the stated objective of consolidating the public finances and reversing the deterioration in fiscal strength witnessed in recent years. The ratings agency will explore the implications of expensive schemes, such as nuclear energy and National Health Insurance, for the government’s finances in an environment of rising interest rates. It will also assess the implications for policy of the prolonged lull in growth, persistent spending pressures and political drivers such as the upcoming local elections.