While Finance Minister Pravin Gordhan is in the United Kingdom trying to woo international investors and prevent a sovereign ratings downgrade, Moody’s Investors Service has placed South Africa’s Baa2 bond and issuer ratings on review for downgrade.
“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,” Moody’s said in a statement.
If Moody’s does indeed downgrade South Africa, it will become a junk country, which has a considerable impact on investment.
Professional investors, such as hedge fund, pension fund and asset managers, have a policy that prevents them from investing in countries carrying a junk status.
The ratings downgrade watch will allow Moody’s to assess to what extent South African government policies can stabilise the economy and restore fiscal strength in the face of heightened domestic and international market volatility.
“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,” the rating agency said.
Moody’s cited South Africa’s weak economic performance as a risk factor when assigning a negative outlook to the rating in December 2015.
“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.”
Since then, growth prospects have worsened. Moody’s expects growth to deteriorate further to 0.5% in 2016, as a consequence of the severe drought and low commodity prices as well as the volatility in global and domestic financial markets since December.
“This resulted in a further steep depreciation of the exchange rate. 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 ascertain if South Africa can reverse the “erosion” of its 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 Moody’s assigned a negative outlook to South Africa in December 2015.
“As with growth, the debt position has continued to deteriorate, even if only slightly.”
Meanwhile, Gordhan has responded, saying a Moodys delegation will meet with South African stakeholders between March 16 and 18 before making a decision on a possible downgrade. – Fin24