International credit rating firm Moody’s has left South Africa’s sovereign debt grading unchanged two notches above junk status, but warned Saturday of a possible future downgrade if reforms to support growth fail to materialise.
Moody’s rates Africa’s most developed economy as Baa2 — meaning it is of investment grade for banks — albeit with a negative outlook.
Instead of the much anticipated formal review of South Africa’s credit rating, Moody’s issued an updated credit opinion overnight, warning that the negative outlook remained because of political tensions and weak growth.
“The negative outlook on South Africa’s Baa2 government bond rating reflects risks related to the implementation of structural reforms aimed at restoring confidence and encouraging investment,” it said in a statement released early Saturday.
It added that the country’s political scene continued to be “noisy” but that key institutions remained resilient.
One of the credit challenges for South Africa is “protracted political infighting that generates policy uncertainty and impedes structural reforms,” it said.
On Friday, another international credit rating firm, Fitch, dropped its outlook for South Africa from stable to negative, citing the country’s recent political turmoil under President Jacob Zuma.
Zuma has been engulfed by graft scandals and a power struggle with Finance Minister Pravin Gordhan, while economic growth has fallen to 0.5 percent and unemployment hit a 13-year high.
Moody’s warned that South Africa’s rating “would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium term growth”.
It also hinted that a rating upgrade was unlikely.
Standard & Poor’s is expected to make its key announcement on South Africa’s investment grading on December 2.
Like Fitch, S&P currently has South Africa rated at the lowest investment grade.
A junk rating by S&P could trigger a bond sell-off by foreign investors, as well as hiking Pretoria’s borrowing costs.