Photographer: Dean Hutton/Bloomberg

South Africa Escapes Junk at Moody's as Rating Cut One Step

  • Country’s foreign-currency debt downgraded to Baa3 from Baa2
  • Moody’s cites reduced growth prospects, weakening institutions

South Africa escaped wall-to-wall junk sovereign assessments from the three biggest ratings companies, after Moody’s Investors Service downgraded the nation one level to the lowest investment grade.

Moody’s cut the nation’s foreign and local-currency ratings to Baa3 and kept the outlook at negative, meaning the next move could be to speculative grade. The company cited weakening institutions, reduced growth prospects and the resultant risks to the country’s finances as reasons for the change in a statement on Friday.

“The risks to growth and fiscal strength arising from the political outlook are tilted to the downside,” Moody’s said. “It is unlikely that a political consensus will emerge, which supports investment in the economy and reinvigorates the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the government’s balance sheet.”

S&P Global Ratings and Fitch Ratings Ltd. cut their foreign-currency assessments of South Africa to junk in April after President Jacob Zuma changed his cabinet and fired Finance Minister Pravin Gordhan. Zuma’s actions sent the rand and bonds plunging and unleashed street demonstrations calling for his ouster.

Top leaders in the ruling African National Congress have said the party risks losing power in 2019 elections if he completes his second five-year term. It will hold a policy conference later this month and elect a new leader in December, when Zuma’s second five-term term as ANC president ends.

“Moody’s views the underlying political dynamics which led to the March cabinet reshuffle as posing a threat to near- and medium-term real gross domestic product growth,” the company said. “The institutional framework has become less transparent, effective and predictable, and policymakers’ commitment to previously articulated reform objectives is less certain.”

Junk Status

South Africa’s economy unexpectedly fell into a recession for the first time since 2009 in the three months through March as all but two industries shrank, the statistics office said June 6.

The ANC conferences “are not expected to translate to policy changes,” the National Treasury said in an emailed statement. Policy transparency and continuity are top priorities for the government and the ruling party, it said.

The ANC, in an emailed statement on Saturday, said it is confident the conferences will reduce political and policy uncertainty and improve investor sentiment.

“The ANC calls on government, the private sector and organized labor to use this latest downgrade as a catalyst for greater urgency in working to alter our economic trajectory and boost confidence in our economy,” said the party’s spokesman, Zizi Kodwa. “We have confidence that where any uncertainty or ambiguities still remain in terms of the ANC’s policy framework, these will be settled decisively.”

Moody’s is the only major credit-rating company to assess both South Africa’s foreign-currency and rand-denominated debt at investment grade. S&P cut the nation’s foreign-currency debt to junk on April 3 and left the local rating one step above. Fitch reduced both assessments to junk four days later, triggering a selloff by some investors tracking investment-grade debt indexes. JPMorgan Chase & Co. said in April it would remove the nation’s dollar-denominated debt from gauges tracked by $59 billion of funds.

The bulk of investments in global index-tracking funds remains safe because about 90 percent of the country’s debt portfolio is rand-denominated. S&P affirmed South Africa’s foreign-currency debt at the highest junk assessment and rand-denominated bonds at the lowest investment grade on June 2. Fitch maintained both its ratings at the highest non-investment grade on June 1.

Moody’s said it could cut South Africa’s rating further if there are indications that the strength and independence of the country’s institutions have diminished more or if policy becomes more unpredictable.

“Unless government is able to meaningfully encourage private-sector investment, which leads to higher economic growth and an improvement in government finances, Moody’s will be forced to downgrade South Africa to below investment grade,” Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg, said in an emailed note. “Such a move would have very significant implications for South Africa’s ability to attract sufficient foreign investment cost-effectively and on a sustained basis.”

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