Photographer: Waldo Swiegers/Bloomberg

South Africa Doesn't Warrant Negative Outlook, Moody's Says

  • Stable outlook means no rating adjustment in next 12-18 months
  • Economy to avoid recession this year, but only barely

South Africa’s credit rating doesn’t warrant a negative outlook despite a worsening economic outlook, Moody’s Investors Service said.

“We have a stable outlook, which means that we don’t expect to change the ratings for the next 12 to 18 months,” Kristin Lindow, senior vice president at Moody’s, said by phone on Wednesday. While there are risks to economic growth, “looking at peers, it certainly makes us believe that the rating is at the right level,” she said.

South Africa’s economy, the second-largest on the continent, contracted for the first time in more than a year in the second quarter as power shortages, falling metal prices and subdued global demand curbed output. Moody’s downgraded South Africa’s rating in November to Baa2, the second-lowest investment grade level, moving the outlook to stable from negative.

The economy will probably avoid a second recession in six years, Moody’s said in a report on Wednesday. The growth rate will probably stand at 1.7 percent this year and won’t reach 3 percent before 2017 or 2018, it said.

“The economy is suffering from the steep collapse in commodity prices, the negative impact of which has been more severe than the benefits obtained from the drop in oil import prices,” Moody’s said. The 1.3 percent quarterly contraction in the three months through June “has sparked speculation about a possible recession, which we think will be avoided, but barely,” it said.

Spending Ceiling

Government debt will probably stabilize at 49 percent of gross domestic product in the fiscal year ending March 31, taking into account the extra cost of the recent public-sector wage deal, Moody’s said. 

Despite the slowdown in growth, “fiscal planners appear to be succeeding in stabilizing the public finances,” Moody’s said.

The government is committed to its expenditure ceiling and reducing the growth in debt, the National Treasury said in an e-mailed statement Wednesday in response to the Moody’s report. The government will also provide support to state-owned companies in a “fiscally sustainable manner,” it said.

While "disappointing" growth is fueling concerns about the economy, the government is staying on track to meet its budget goals including for spending and tax collection, Konrad Reuss, Standard & Poor’s managing director for South Africa, said in an interview Wednesday in the Zambian capital, Lusaka.

"If we see another quarter with a weak economy one would have to raise the question, what does that mean for the fiscal target?," he said.

The rand’s 14 percent slide against the dollar this year “does not create the kind of vulnerability that it does in other countries” because of South Africa’s low exposure to foreign debt, Lindow said. Foreign-currency debt makes up about 10 percent of South Africa’s total liabilities, according to the Treasury.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE