SA's sovereign rating unchangedSouth African credit rating maintained South Africa''s rating would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium-term growth, according to Moody''s. Rating agency Moody''s recently kept South Africa''s sovereign debt rating unchanged at Baa2, two notches above junk status. Moody''s however changed its outlook from stable to negative. Explaining the rationale behind its move, it said in a report: “While South Africa''s government has consistently met its expenditure ceilings and is close to bringing the primary fiscal balance into surplus, low growth, revenue shortfalls and in some years the weakening rand are driving an increase in government debt to GDP ratios.
“Delays to growth and a faster-than-projected rise in interest rates are among key risks to a stabilisation of the debt-to-GDP ratio by 2018/19. Other risks include rising contingent liabilities related to government guarantees to state-owned enterprises and spending pressures in the run-up to the 2019 general election.
“Implementing the fiscal consolidation targets set out in the 2016 Medium-Term Budget Policy Statement, not just in nominal rand terms, but also in terms of stabilising the debt-to-GDP ratio - will be key if South Africa is to preserve macroeconomic credibility and boost investor confidence.
In Moody''s view, the government will stay within its expenditure ceilings, but meeting revenue targets will be challenging in the weak economic environment,” the ratings agency said.
“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, upon which Moody''s bases its expectations for a gradual growth recovery and debt stabilisation in coming years.”
Added Moody''s: “The negative outlook also recognises the downside risks associated with political uncertainty and low business confidence as well as the challenging external environment characterised by low growth, investment and trade.
South Africa''s rating would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium-term growth according to Moody''s.
“Continued accumulation of public debt and contingent liabilities in terms of GDP would also put downward pressure on ratings.
Finally, political infighting impeding the government''s ability to implement key structural reforms and contributing to protracted low business confidence would also be negative.”
“While a rating upgrade is unlikely, Moody''s would change the outlook from negative to stable if the government would undertake structural reforms that would bring the economy on a path of higher and sustainable growth and stabilise the general government debt and contingent liabilities relative to GDP ratios.
Boosting business confidence through reforms in the areas of labour markets, electricity, and state-owned enterprises would be credit positive,” the ratings agency concluded.
STAFF REPORTER