South Africa’s debt credit rating now lies just one “notch” away from an official Downgrade to Junk Status

 

Moody’s Investors Service downgraded the long-term and senior unsecured ratings of the South African Government to Baa3 from Baa2

Baa3 represents the final straw before a complete and official downgrade takes place. Both S&P and Fitch have downgraded South Africa’s foreign currency debt to Sub Investment grade a.k.a Junk.

Moodys listed three key reasons for the downgrade:

1) The weakening of South Africa’s institutional framework

2) Reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms

3) The continued erosion of fiscal strength due to rising public debt and contingent liabilities

On Growth Prospects they had the following to say:

As a consequence, Moody’s views the underlying political dynamic that led to the March cabinet reshuffle as posing a threat to near- and medium-term real GDP growth.

On Growth Forecasts they confirmed the following:

Medium-term growth will additionally be constrained by mixed progress with structural reforms, including delays in the implementation of reforms in the mining sector, in the governance of state-owned enterprises, and in the elimination of barriers to competition in key network sectors. With the economy already recording two consecutive quarters of contraction prior to the cabinet reshuffle, Moody’s forecasts growth below 1% in 2017 and 1.5% in 2018, with stagnating investment reducing medium-term (and potential) growth as well.

Their view on South African debt can be highlighted as follows:

“In Moody’s view, lower than expected growth will delay the stabilization of South Africa’s debt-to-GDP ratio. Instead of stabilizing in 2018/19, Moody’s now expects the debt burden will reach about 55% of GDP that year and continue to rise gradually afterwards. Under-performance on revenue collection is another risk.”

Lastly, we look at that which could result in Moody’s changing the ratings downward. We have summarized their text as follows:

1) The government’s success in safeguarding South Africa’s institutional, economic and fiscal strength.

2) 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.

3) Further delays in growth enhancing reforms would be suggestive of such a shift.

4) Cash flow pressures begin to reemerge at state-owned enterprises that would elicit pronounced government intervention, be it through the activation of guarantees or other measures.

A link to the full report can be found here