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Despite political noise, SA institutions remain strong - Moody's

Sep 20 2016 13:46
Lameez Omarjee

David Aldrich, associate managing director of emerging markets, Kristin Lindow, senior vice president and Zuzana Brixiova, vice president and senior analyst during a question and answer session at Moody's 11th Annual South African Credit Risk Conference. (Lameez Omarjee)

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Johannesburg – Despite the “noisy” political scene, rating agency Moody’s is more concerned about the continuation of policy reform when it makes its decision on South Africa's credit rating.

At a press briefing at Moody's annual South African credit risk conference in Sandton on Tuesday, senior vice-president Kristin Lindow and vice-president and senior analyst Zuzana Brixiova spoke about what the rating agency will be looking at when it makes its decision on the country’s sovereign rating.

An update could possibly be announced on November 25, but it is also possible that no rating action will be taken, explained Lindow. Moody's does not expect to upgrade the rating from its current Baa2 with a negative outlook in the near future.

“Despite the noisy political scene, South African institutions remain strong,” said Brixiova. This includes the independent judiciary, the Reserve Bank, the auditor general and National Treasury. “The noise is not an issue; it is only an issue if it impedes structural reform and investor confidence,” she said.

The outcome from recent local elections indicates the strength of South Africa’s maturing democracy, explained Lindow. The local elections reflected the changing demographics of the electorate such as increased urbanisation and a rising black middle class, said Brixiova. Rising opposition puts competitive pressure on the implementation of structural reform.

READ: Moody's underwhelmed by SA growth figures

Factors for and against a junk downgrade

In Moody’s credit opinion released last week, the rating agency explained that a downgrade would result if South Africa fails to ensure growth recovery, and if structural reforms are not in place to contribute towards sustainable growth and stabilise debt. “We would likely downgrade the rating in the absence of growth recovery,” said Lindow.

Positive drivers to stabilise the rating depends on government’s ability to deliver on its reform commitments and maintain fiscal consolidation and contingent liabilities, explained Lindow. Reviving business confidence and improving labour market flexibility and reforming state-owned enterprises (SOEs) will also be positive for the rating.

South Africa’s other credit strengths include its deep and liquid financial markets, its low foreign currency debt, and close and rising ties with African markets.

Further credit challenges include the accumulation of public debt and government contingent liabilities, because of the financially weak SOEs. Brixiova said Moody's is concerned about the continuation of fiscal consolidation. Leadership changes in Treasury cause concern about policy changes.

Regarding government’s Presidential CEO Initiative which aims to restore investor confidence, Brixiova said the extent to which these stakeholders work together is important, and an indication of structural reforms being implemented. 

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