SA credit rating revised down by Moody's to to A3 negative from A3 stable

Moody’s rating agency has revised down South Africa’s local- and foreign-currency debt rating to A3 negative from A3 stable. The main reason for the adjustment according to Moody’s is “heightened political risk in the context of more constrained public finances”.

In summary, the main drivers for the negative outlook include:

• The growing risk that the political commitment to low budget deficits and the ability to keep within current debt targets could be undermined by popular pressures and rising internal strains within the ANC, and between the ANC and its partners. A substantial proportion of the government budget is already absorbed by wages, social support and debt service, limiting the room for new growth-supportive spending.
  
  
• Expectations that growth will be somewhat slower than previously expected and limited to roughly 3% to 3.5% over the medium term, which is insufficient to prevent already high unemployment rates from increasing further, thereby exacerbating social tensions.
  
  
• Moody's believes that the political leadership's unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions is harmful to South Africa's economic prospects, in particular private investment.
  
  
• The agency also says that nationalisation of the mines and/or other sectors - however unlikely to happen - would not achieve the stated aim of accelerating progress on black economic transformation. Instead, such moves are more likely to do the opposite, reducing the country's attractiveness to both local and foreign investors, and encouraging the outward migration of citizens and businesses. Such actions would in turn raise the risk premium on government debt, further inflating the already-rising costs of debt service.

Overall, Moody's believes that the next two years will be especially challenging for South Africa's political system, with the potential for further pressures emerging for the established economic policy framework during this period. Importantly, higher domestic savings and investment rates would support a rating upgrade, as would sustainably stronger growth, restrained debt accumulation and the maintenance of sound economic policies by the current administration and its successors. Equally, the ratings could be downgraded in the event of a serious and durable deterioration in the debt metrics and/or heightened socio-political pressures that are not addressed in a manner consistent with future debt sustainability.