South Africa dodges junk status
Ratings agency Moody’s has upheld South Africa’s baa3 credit rating – one notch above junk – and has adjusted the country’s outlook from negative to stable.
According to the group, the decision reflects Moody’s view that the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework.
“The recovery of the country’s institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilisation of fiscal strength,” it said.
“The stable outlook reflects a careful balance of risks. The new administration faces equally significant opportunities and challenges.
“Steady progress in meeting the objectives set out in the President’s recent State of the Nation Address (SONA) will be needed if the recovery in confidence that will be essential for the country’s economic and fiscal prospects is to be sustained.
“Success offers the prospect of a virtuous circle of economic recovery, fiscal consolidation and rising social cohesion. But the political, policy and practical challenges of meeting diverse economic, social and fiscal objectives cannot be underestimated.
“Failure, at least as perceived by investors or voters, could lead to a further cycle of eroding economic, fiscal and institutional strength,” Moody’s said.
The group attributed its decision to three key factors:
- First, there has been a halt in the deterioration of South Africa’s institutional framework, with long-standing strengths preserved and some rebuilding occurring;
- Second, there has been improved growth in the country and prospects for further growth look good; and
- Third, government has presented fiscal adjustment plans that would stabilise and eventually reduce the debt burden.
“The recent change in political leadership appears to have halted the gradual erosion of the strength of South Africa’s institutions,” Moody’sa said.
“With changes in governance, a number of key institutions, including the Treasury, the South African Revenue Service (SARS) and key State-Owned Enterprises (SOEs) have embarked on the recovery of their earlier strength.”
The change in political leadership comes in parallel with growing signs of cyclical, and perhaps structural, improvements in economic growth, it said.
Overall, Moody’s now expects the government’s debt burden to stabilise at around 55% of GDP over the 2018-2020 period.
The ratings firm attributed its stable outlook to a balance of factors at play.
What could change the rating up
Future rating actions will most likely be driven by the effectiveness with which the government is able to address the institutional problems of the recent past in the pursuit of its economic and fiscal reform agenda.
The successful implementation of structural reforms to raise potential growth as well as stabilise and eventually reduce the debt burden, including through reforms to the SOE sector which reduce contingent liabilities, would put upward pressure on the rating.
In particular, reforms resulting in higher savings and investment rates and broad-based, sustainable, job-creating growth, alongside rebuilding of fiscal buffers would provide positive momentum to the rating.
In reaching such a conclusion, Moody’s said it would consider the longer-term ramifications of near-term fiscal and economic outcomes, as well as progress in enacting reform measures and resolving long-standing structural issues, including those relating to mining and agriculture.
What could change the rating down
Conversely, South Africa’s ratings would be placed on negative outlook or review for downgrade, and eventually downgraded if it were to become clear that the government’s commitment to, or capacity to engineer, revived growth and debt stabilisation were to falter.
In reaching such a judgment, Moody’s said it would consider the government’s success in delivering planned structural reforms in the period between now and the 2019 Presidential elections, and to the impact of its actions or inaction on the investment climate and on near-term and potential growth.
Negative developments in fiscal policy would also weigh on the rating. This includes the potential for SOE sector risks crystallising in a manner which raised the government debt burden and put it on a higher trajectory.
Read: Investors are confident that South Africa will avoid junk status in March
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