Moody’s says South Africa’s rating outlook is now negative
Moody’s Investors Service has affirmed South Africa’s Baa2 government issuer ratings and changed the rating outlook to negative from stable.
The decision to change the outlook rested on two main drivers:
- Increased probability that growth will remain low for a prolonged period of time due to the structural challenges facing the mining industry and other sectors of the economy; and,
- Rising risk of fiscal slippages in the face of both slower growth and increasing political pressures.
Moody’s affirmed the government’s Baa2 rating because of the country’s track record of sound macroeconomic policies. “Credit metrics are still roughly in line with similarly rated peers in terms of both quantitative and qualitative comparisons and the external position is manageable, despite a steep depreciation of the exchange rate and heightened risk aversion to emerging market exposure in global capital markets,” the ratings firm said.
It said that although growth has continually disappointed in recent years due to a combination of domestic and external circumstances, spending restraint and the buoyancy of fiscal revenues to date has led to only marginal deviations for budget deficits and debt.
“At the same time, moderate foreign currency debt exposure has limited the impact of the depreciation of the rand and capital inflows have been sufficient to finance the shrinking current account deficit.”
Moody’s noted that South Africa’s latest growth projections assume just 1.4% growth in 2015 and 2016, compared to forecasts averaging double that pace a year ago, and project that growth will not reach 3% again before 2020.
“The weak external position, and in particular the implications of the collapse in the rand for inflation and interest rates, pose additional downside risks to growth.”
Addiotional sustained pressures include the protracted delay in overcoming the country’s electricity shortages, slowing growth in China, the downturn in commodity prices and the long-anticipated hike in US interest rates.
Moreover, output in agriculture and other water-dependent sectors has been severely hit by southern Africa’s worst drought in 34 years, Moody’s said.
South Africa’s challenging investment climate restricts its long-term economic growth potential, which in Moody’s opinion derives principally from shortfalls in both human and physical infrastructure resources as well as political/policy uncertainty.
Skills shortages are the result of the inadequacies of the education system despite the broadening of public schooling to all segments of society and substantial budget outlays year after year in the past two decades.
Other important aspects constraining growth potential are the rigid regulatory framework governing the labor market and relatively militant unions in key occupations, such as mining and the public sector.
The second driver for the negative outlook is the risk that public spending restraint will weaken in the face of political pressures while revenues underperform in the context of a prolonged period of sub-par growth.
“The South African government faces persistent fiscal pressures as a consequence of still-prevalent unemployment and poverty. The authorities’ ability to stabilize the government’s debt ratios is subject to very significant challenges that go beyond the consequences of low growth for tax revenue,” Moody’s said.
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