Moody’s downgrades South Africa debt by a notch, raises outlook

Ratings agency Moody’s downgraded South Africa’s Baa1 sovereign debt rating by one notch to Baa2 on Thursday, and changed the outlook to stable from negative.

The ratings agency noted in its outlook revision that there were “poor medium-term growth prospects due to structural weaknesses, including ongoing energy shortages as well as rising interest rates”.

Moody’s however said policymakers in Africa’s second largest but most developed economy had shown “commitment to reining in government debt growth over the medium term and the broad political support for a macroeconomic strategy”.

That earned the country the improved outlook to stable status despite “further deterioration in the investor climate and a less supportive capital market environment”.

The downgrade is two notches above junk status, a rating that still keeps it in the investment grade.

South Africa’s treasury lauded the agency’s decision to assign the country a stable outlook saying it “affirms government’s commitment to fiscal discipline”.

“Government is committed to narrowing the budget deficit, stabilising debt and rebuilding the fiscal space that enabled South Africa to escape the worst effects of the global economic crisis,” said treasury in a statement.

The country narrowly escaped a recession in the first half of the year.

– Downgrade not surprising -Finance Minister Nhlanhla Nene last month slashed this year’s growth forecast to 1.

4 percent, from the 2.

7 percent estimated in the February budget.

Nene said it was time government capped spending and raise taxes to tackle its soaring deficit in the face of the stalling growth.

He blamed the poor performance domestic energy shortages, labour strikes, “administrative shortcomings” and global environment.

Moody’s ratings lowering did not surprise analysts who saw it coming.

“Moody’s has for some time now both stuck out versus the other agencies and been highlighting the weak structural position of the sovereign,” said Peter Attard Montalto of Nomura.

Standard and Poor’s lowered South Africa’s sovereign rating to one level above junk status in June, heaping pressure on the government to better balance its books.

“What seems to have tipped Moody’s over the edge is a marked revision down in its framework for both the growth outlook and potential growth estimates, which made the credit profile more problematic,” he said in a note.

Fitch is due to update its rating of South Africa in December and chances are that it will also downgrade the continental powerhouse.

Moody’s says the ratings could move upward if government “successfully” implements planned structural reforms to push up potential growth and minimise exposure to external shocks, while at the same time pressing ahead with fiscal prudence.

Government expects economic growth to rise to three percent in 2017, but that is still well below South Africa’s potential and means the government is unable to raise as much tax as it expects.

It also falls far short of the growth needed to tackle unemployment, which is hovering over 25 percent, and the consequent social unrest.

As a result of slow growth, tax revenue was this year below projections, pushing the deficit up to 4.

1 percent of gross domestic product (GDP), according to the finance minister.