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.
The first driver for the review is to allow Moody’s to assess to the likelihood that the decline in South Africa’s economic strength will be reversed over the medium term.
Moody’s cited South Africa’s weak economic performance as a risk factor when assigning a negative outlook to the rating in December 2015 saying 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 percent, the slowest pace since the 2009 global financial crisis.
Since then, growth prospects have worsened.
Moody’s expects growth to decline still further, to 0.5 percent in 2016, as a consequence of the intensification of this year’s drought, low commodity prices as well as the volatility in global and domestic financial markets since December, resulting in a further steep depreciation of the exchange rate and widening bond yields.
The drought has necessitated imports of key grain crops and pushed up food prices and overall inflation rates, leading to interest rate rises which have further undermined growth.
This has also led the government to reallocate spending from other areas to provide drought relief.
The second driver of the review is to allow Moody’s to 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.
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 percent of GDP this fiscal year from a trough of 26.5 percent 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 could downgrade the rating if the review was to conclude that government policy and strategy is unlikely to lead to a reversal in the debt trajectory.
Moody’s would confirm the rating at Baa2 if the review were to conclude that policymakers will maintain spending restraint, succeed in the delivery of planned structural reforms, achieve the fiscal consolidation envisioned in the 2016/17 Budget Review, and thereby reverse the deterioration in key credit metrics witnessed in the past few years.
