Johannesburg: South Africa escaped wall-to-wall junk sovereign assessments from the three biggest ratings companies after Moody’s Investors Service downgraded the nation by one level to the lowest investment grade, citing the effect of politics on institutions and economic growth.
Moody’s cut the nation’s foreign and local-currency ratings to Baa 3, 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 on changed his cabinet and fired Finance Minister Pravin Gordhan. The decision sent the rand and bonds plunging, and sparked street demonstrations pushing for Zuma’s ouster and opposition parties to call for a no-confidence vote in parliament.
Several top leaders in the ruling African National Congress have said the party risks losing power in 2019 elections if he’s allowed to complete his second five-year term. It will hold a policy conference at the end of this month and will 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 month through March as all but two industries shrank, the statistics office said June 6.
“The outcomes of the conferences of the ANC in June and December 2017 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.
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 sell-off 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 per cent 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 the 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, the 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.”
