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Unemployment threatens SA rating

Jun 09 2011 14:49 Reuters

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Johannesburg - South Africa’s high unemployment rate is a major threat to the country’s investment grade rating, said Kristin Lindow, Moody’s senior vice-president and regional credit officer for Europe and Africa, on Thursday.

Lindow was speaking at a Moody’s conference in Johannesburg.

A quarter of South Africa’s 17 million strong labour force is unemployed, leaving many stuck in poverty and raising the risk of instability.

Lindow said in an interview that the rating outlook for South Africa remains stable, with little in its present policy stance to apply downward pressure, but unemployment is a major constraint.
 
Planned secrecy laws that would make exposing corruption or dodgy government deals punishable with prison could also undermine Moody’s assessment of South Africa, said Lindow.
 
Moody’s raised South Africa’s foreign currency rating to A3 in 2009 and lowered the domestic currency rating to the same level, saying the outlook remained stable.
 
“Right now South Africa’s rating is at top of its range... so we don’t expect any further push up nor do we see pressure downwards for the moment,” Lindow told Reuters at the sidelines of a conference.
 
While South Africa, saddled with an economy struggling to grow after a recession in 2009, has seen its budget deficit swell back to around 5% after small surpluses, its finances remained healthy and economic policy sound.
 
“There’s room for that (budget deficit) to occur, although there’s a question mark as to what the plans are in the longer term and how long will this go on, and that’s something I think needs to be addressed.
 
Standard and Poor’s upgraded South Africa’s outlook to stable from negative in January, but warned increasing public debt levels could reduce budget flexibility.
 
Fitch issued a similar assessment the same month, saying South Africa’s recovery in 2010 after its first recession in nearly two decades had outpaced expectations.

But on Thursday Lindow said the high unemployment rate - especially after the economic contraction slashed about a million jobs - posed a threat.

“Unemployment and other socioeconomic factors are clearly the major constraint for South Africa’s rating going forward,” Lindow said. “It’s a constraint because it’s definitely a political issue.

"There are concerns that the economy is not generating enough jobs to absorb new entrants into the labour force, not to mention that very large pool of the unemployed.”

Another worry was a proposed new law that, if passed, would restrict access to information from official regulators and state-owned enterprises, a move critics say could deprive investors of important commercial information.

“To the extent that this leads to a reduced level of public transparency, that could have an impact on our assessment of institutional strength in South Africa,” Lindow said.
 
“The question is whether or not we see that as a signal of future trends.”
moody's  |  south africa  |  unemployment
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