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Treasury downplays Moody's downgrade

Nov 09 2011 17:03
Johannesburg - South Africa played down suggestions from Moody's on Wednesday that political pressure could lead to a further deterioration in public finances, saying Pretoria is committed to a sustainable fiscal path.

"Our debt metrics have not deteriorated compared to our counterparts and also if you look at how we are managing our debt, we've made it clear that although the deficit is widening we are not borrowing more," Treasury spokesperson Bulelwa Boqwana said.

Ratings agency Moody's cut South Africa's A3 rating outlook to negative from stable, voicing concern that pressure from unions and black voters wanting greater economic redress for the ills of apartheid could erode the country's finances.

The move worsened an already weak session for the currency and bonds, with the rand falling more than 2.5% to an intraday low of 8.0255 against the dollar. It recovered marginally to 7.9750 by 13:00 GMT.

The yield on the 2015 bond rose 13 basis points to 6.5% and that on the 2026 note climbed 15.5 basis points to 8.335%.

Boqwana said the rand bond weakness was just "a knee-jerk reaction" to an unexpected appraisal.

In its three-year policy framework unveiled last month, the Treasury said the budget deficit for this year would be higher than previously anticipated at 5.5%, while weak growth would result in lower revenues.

South Africa's fiscal accounts were in surplus for two years before a 2009 recession but swung back into deficit as the government spent more to counter the effects of a global slowdown.

More than a million people lost jobs in the recession, and a quarter of the labour force is jobless. Millions of poor people are becoming disillusioned with the ANC government, raising the risk of social instability.

The government has said the economy needs to grow by an average 7% a year - more than double the 3.1% expected in 2011 - to make a dent in unemployment.

Policy strife

Moody's noted that the unemployment rate is likely to remain high.

It said the ANC's "unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions was harmful to South Africa's economic prospects".

Investors have been unsettled for two years by the ANC Youth League's talk of nationalising mines. The ANC has said nationalisation is not government policy but has not dismissed it out of hand.

The Treasury's Boqwana said policy discussions inside the ANC are not government policy.

"We should differentiate between political processes happening outside government and within the ANC," she said. "There is no evidence that those policies have filtered into government."

Absa Capital said a ratings downgrade is unlikely to ensue unless the political noise becomes a reality after two major ANC conferences next year.

"Calls for greater state involvement in the economy and for a larger push on redistribution are being made very loudly from some parts of the ANC sphere, but it remains far from clear as to what changes in broad policy, if any, might be agreed in the course of 2012," it said in a note.

"We do not believe that a ratings - rather than outlook - downgrade is likely until more clarity on the outcomes of these policy debates is delivered."

Standard & Poor's regional head Konrad Reuss said the company was comfortable with its BBB+ rating - lower than Moody's - and did not detect signs of policy stress.

"The key issue is that there are no signs at this point that the government is changing direction with regards to its long-term policy of pursuing a sustainable fiscal policy," Reuss said.


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