South African Rating Outlook Cut to Negative by Moody's

  • Baa2 credit grade affirmed; second-lowest investment grade
  • S&P, Fitch rate South Africa one level above junk status

South Africa’s credit-rating outlook was cut to negative by Moody’s Investors Service, which said the country faces a prolonged period of slow growth and increasing political pressures.

Moody’s lowered the outlook from stable and maintained the country’s credit grade at Baa2, the second-lowest investment grade, according to a statement. That’s one level above the rankings of Standard & Poor’s and Fitch Ratings.

South Africa’s “increasingly weak” growth outlook is likely to continue amid “persistent structural challenges,” Moody’s analysts Kristin Lindow in New York and London-based Yves Lemay said in the statement. The risk of “fiscal slippages in the face of both slower growth and increasing political pressures” is increasing, they said.

South Africa’s gross debt has surged to almost 50 percent of gross domestic product from about 26 percent in 2009 when President Jacob Zuma came to power. While former Finance Minister Nhlanhla Nene had sought to contain spending in a bid to rein in a widening budget deficit, his efforts have been frustrated by the government awarding above-inflation wage increases to workers over three years.

“Moody’s concerns about a rising risk of fiscal slippage are being addressed,” the National Treasury said in an e-mailed statement. “Government is aware that the country’s economic growth performance needs to be improved and thus made the resolution of the energy challenge an immediate priority.”

Stagnating Economy

South Africa’s economy, the largest on the continent after Nigeria’s, is stagnating as electricity shortages, weakening global demand and falling metal prices stifle output and will probably expand 1.4 percent this year, according to the central bank, which will be the slowest since a 2009 recession. Zuma shocked global investors and raised concern over the credibility of his economic policies by replacing Nene with a little-known lawmaker, David van Rooyen, on Dec. 9 and then replacing Van Rooyen with Pravin Gordhan, who served as finance minister for five years from 2009, four days later.

Van Rooyen’s appointment sent the rand to a record low, while bond yields jumped to a seven-year high. The currency has tumbled 23 percent in 2015 against the dollar as raw-material prices plunged, and the country faces the prospect of a U.S. interest-rate increase on Wednesday that is expected to accelerate capital outflows from developing nations. The rand was 0.6 percent weaker at 15.0155 per dollar at 12:08 p.m. in Johannesburg on Wednesday.

Policy Continuity

“The reappointment of Minister Pravin Gordhan as the minister of finance will ensure policy continuity,” the Treasury said. “The Minister has affirmed that government will stay the course of sound fiscal management and focus on fiscal consolidation and debt stabilization in the medium term.”

Fitch cut the country’s grade to BBB-, the lowest investment-assessment level, on Dec. 4. S&P lowered the outlook on its equivalent rating to negative from stable on the same day.

“Even Moody’s, which is not as bearish as the other two main agencies, believes the fiasco over Mr. Nene’s ouster has thrown South Africa’s vulnerabilities into sharper relief,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said in an e-mailed response to questions. Nene’s removal is “the kind of debacle that forces investors to start connecting the dots: a severe lack of growth, a dearth of reforms, rapidly deteriorating creditworthiness and a harsh external environment for emerging markets.”

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