Financial markets expected Moody’s Investors Service (Moody’s) downgrade of the South African government’s debt rating, Investec said on Friday.<\/p>\n
“The Moody’s downgrade was expected, as typically the agency keeps SA’s rating one notch above the rating of either Fitch and\/or [Standard & Poor’s] depending on which has the lowest rating for SA,” said economist Annabel Bishop in a statement.<\/p>\n
“The rand was about 12 cents weaker against the US dollar after the downgrade, but only five cents weaker against the euro and UK pound, implying most of the rand’s weakness against the US dollar is due to US dollar strength.”<\/p>\n
This indicated the markets had expected the downgrade.<\/p>\n
“Moody’s rating aligns with Fitch which has SA on a sovereign rating of BBB-,” Bishop said.<\/p>\n
“However, Fitch has a negative outlook on SA and could downgrade its rating to BBB- in early December. South Africa now holds a two-tiered rating, Baa2 from Moody’s, BBB from Fitch, and BBB- from S&P.”<\/p>\n
On Thursday, in a statement released on Moody’s website, the agency said it had downgraded the South African government’s debt rating to Baa2 from Baa1.<\/p>\n
“The government’s short-term debt rating is affirmed at a provisional prime -2 ((P)P-2),” Moody’s said.<\/p>\n
“The outlook on the rating was changed to stable from negative.”<\/p>\n
There were two primary reasons for the rating downgrade.<\/p>\n
The first was poor medium-term growth prospects, due to structural weaknesses.<\/p>\n
This included ongoing energy shortages, rising interest rates, investor climate deterioration, and a less supportive capital market environment for countries like South Africa, which were highly dependent on external capital.<\/p>\n
The second reason was the prospect of further rises in the government debt-to-GDP ratio implied by the low-growth environment.<\/p>\n
“Even strict compliance with the government spending ceiling and somewhat smaller fiscal deficits are unlikely to arrest in the near term,” Moody’s said.<\/p>\n
Bishop said Investec’s economic scenarios contained one rating downgrade from each agency, as well as significantly higher interest rates, recession, and marked rand weakness.<\/p>\n
“It is key that Moody’s said part of the reason for the downgrade is expected higher interest rates in South Africa,” she said.<\/p>\n
“In particular Moody’s believes economic growth will be vulnerable in South Africa as the Reserve Bank increases interest rates gradually, particularly affecting low-income earners.”<\/p>\n
Investec believed this was “absolutely key” as economic demand was subdued in South Africa and inflation was falling.<\/p>\n
“We remain of the view interest rates will remain unchanged in November, with not more than a 75bp [basis point] hike in 2014, and the potential for 50bp of the 75bp not to materialises if economic growth remains weak.”<\/p>\n
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