Bleak outlook spells junk for South Africa

Ratings agency Moody’s has once again raised concern around the political and financial stability of South Africa, with recent developments pointing to a downgrade to junk coming sooner rather than later.

In an investor outlook released on Wednesday, the ratings firm noted that political and social considerations continued to be an obstacle to rapid reforms within the country, leaving it vulnerable to a deterioration in credit profiles in the event of a shock.

Other threats that could potentially affect “at risk”sovereign nations include:

  • Domestic political uncertainty and social tensions, which weaken the commitment to economic and fiscal reform.
  • High public debt levels – leaving little space to respond to shocks; and
  • The potential for destabilizing political events remains

According to a report by BusinessDay, Moody’s has already dispatched an out-of-schedule delegation to South Africa this week, highlighting the agency’s concerns.

This could point to a downgrade arriving sooner than expected, said economist Thabi Leoka, who along with many other economists and analysts noted that a downgrade was inevitable within the next two weeks.

Moody’s is currently the only agency that has SA above junk status, with both local and foreign currency debt sitting at one notch above junk.

If Moody’s sends South Africa into junk, it will result in the country being pushed out of the World Government Bond Index, which will have a severe impact on the investment in the country.

Investors and hedge funds are bound by policy to avoid countries which are not part of the WGBI, and conservative estimates point to an immediate disinvestment of R100 billion by foreign investors.

Some analysts say the outflow could go over R200 billion.

The Moody’s outlook comes after the International Monetary Fund’s review of South Africa, in which it noted slow growth and inefficiencies in public enterprises – which have taken a toll on public finances by generating a substantial revenue shortfall and prompting unplanned expenditure.

The IMF urged the presidency and National Treasury to adopt fiscal measures that would encourage better tax collection and to stop unnecessary spending.

“Emphasis should be placed on prompt implementation of sanctions against deviations from the Public Financial Management Act to increase deterrence,” it said.

“Early announcement and timely implementation of a strong adjustment and reform plan is now a priority to restore investor and consumer confidence.”

Read: Why full junk status for South Africa is inevitable

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Bleak outlook spells junk for South Africa