Moody’s May Spare South African Slide to Junk as Zuma Clings On

  • Company cut nation to lowest investment-grade rating in June
  • Lack of political upheaval is positive, Citadel’s Herman says

South African President Zuma Survives No-Confidence Vote

South Africa could escape a further slide to junk status on Friday in the same way the nation’s leader, Jacob Zuma, defeated a parliamentary rebellion and clung onto power -- comfortably but not without some sweating.

Moody’s Investors Service is scheduled to release a ratings review two months after it cut the local- and foreign-currency assessments to one level above junk, citing risks to growth and fiscal strength due to the political outlook. That was after it put South Africa on review for a downgrade following a cabinet reshuffle in which Zuma fired Pravin Gordhan as finance minister, prompting S&P Global Ratings and Fitch Ratings Ltd. to cut the nation to sub-investment grade.

Policy uncertainty and political turmoil increased in the last two months as the nation’s anti-graft ombudsman instructed lawmakers to change the central bank’s mandate, the mines minister published new regulations and Zuma’s defeat of a no-confidence motion in parliament sent the rand weaker. South Africa entered a recession in the first quarter.

“The fact that there is no political change or upheaval or unscheduled change of a president, all those are positive,” George Herman, the chief investment officer at Citadel Investment Services in Cape Town, said by phone. “I don’t think ratings agencies are in the business of taking a qualitative view on the standard of the president. The survival of the president from a ratings point of view is credit-positive.”

Against Zuma

All but one of 11 economists in a Bloomberg survey said Moody’s will keep the foreign-currency rating unchanged. Only two of the 11 predicted the local-currency assessment will be cut to junk.

While the no-confidence motion in Zuma was defeated by 198 votes to 177 on Aug. 8, more than two dozen members of his ruling African National Congress opposed him. The ANC will elect new leaders in December when Zuma is due to step down. The party’s new head will probably succeed him as president of the country in 2019.

Moody’s is the only major credit-rating company to assess both South Africa’s foreign-currency and rand-denominated debt at investment grade. The bulk of investments in global index-tracking funds remains safe because about 90 percent of the country’s debt portfolio is rand-denominated. A downgrade of the local-currency rating could trigger a large outflow of funds as the debt will then be excluded from certain indexes.

Moody’s and S&P’s next reviews are scheduled for Nov. 24.

The rand was little changed at 13.4576 per dollar by 3:26 p.m. in Johannesburg. It’s weakened 1.7 percent since Zuma defeated the no-confidence motion.

In November, Moody’s issued a research report instead of a ratings action on the scheduled date and the company could again offer no update on Friday, according to Peter Attard Montalto, chief emerging-markets economist at Nomura International Plc. in London. The company may wait for more information from the mid-term budget in October and developments around state-owned companies, he said in written comments.

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