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Moody's warns political infighting could see SA downgraded

Cape Town – Moody’s warned on Wednesday that political infighting could result in a downgrade of South Africa’s sovereign rating.

The warning comes amid increasing criticism towards rating agencies from the ANC, with secretary general Gwede Mantashe accusing them of trying to steer the country in a particular direction.

“We do what is right for South Africa and rating agencies must rate us on our work,” he said in January. “Unfortunately, they are very influential in terms of your status in the international financial world.”

ANC deputy secretary general Jessie Duarte said the ANC is concerned about the “political slanting of rating agencies”.

“We have been very concerned about the political slanting of rating agencies and regarding political slanting as a risk.

READ: Moody’s must stay away from SA - ANCYL

Standard & Poor’s and Fitch both have South Africa at BBB- with a negative outlook. This is one notch above junk status. The current rank assigned by Moody’s is two notches above sub-investment grade, with a negative outlook.

The difference between a downgrade and an upgrade

Moody’s said in its credit opinion that it would likely downgrade South Africa “in the absence of fundamental structural reforms supporting higher and sustainable medium term growth".

The report was written by Zuzana Brixiova, Moody’s vice president and lead sovereign analyst for South Africa.

Moody's projected the country's GDP growing by 1.1% in 2017 and 1.7% in 2018. This is on par with the SA Reserve Bank's projection, but is lower than S&P's projection of a 1.4% increase in 2017 and 1.8% in 2018.

Brixiova said a "continued accumulation of public debt and contingent liabilities in terms of GDP would also put downward pressure on ratings.

“Finally, political infighting impeding the government’s ability to implement key structural reforms and contributing to protracted low business confidence would also be negative,” Brixiova said.

READ: Call for ANC to sue rating agencies 'silly and a waste of time'

While Moody's said a rating upgrade is unlikely, it "would change the outlook from negative to stable if the government would undertake structural reforms that would bring the economy on a path of higher and sustainable growth and stabilise the general government debt and contingent liabilities relative to GDP ratios.

“Boosting business confidence through reforms in the areas of labour markets, electricity, and state-owned enterprises would be credit positive.”

The good, the bad and the ugly

Brixiova said the main credit strengths of South Africa's rating are a deep and well developed domestic financial markets and well capitalised banking sector; accountability and independence of key institutions such as the judiciary, the Reserve Bank and the National Treasury; a sound macroeconomic framework; and a low foreign currency debt.

Brixiova said credit challenges include protracted political tensions that generate policy uncertainty and impede structural reforms; low growth reflecting persistent structural bottlenecks amid challenging global environment; accumulation of public debt and government contingent liabilities linked to financially weak state-owned enterprises; and high and persistent unemployment, especially among youth, depletes human capital and increases the potential for extended protests.

Protracted political tensions

Brixiova said the protracted political tensions, which “generate policy uncertainty and impede structural reforms”, were reinforced by local elections that took place in August.

“The results highlighted the deepening of pluralistic party competition in South Africa, with political infighting within the ANC likely to rise in the run up to December 2017, when the party is set to select a new leader and other top officials.”

READ: ANC power race: Who will win? Zuma, Ramaphosa or Gauteng elites?

On a positive side, Brixiova said the political scene continues to test key institutions “which remain resilient”.

“For example, fiscal consolidation remains broadly on track despite spending pressures,” Brixiova said.

It cited the NPA’s decision to drop charges of fraud against Minister of Finance Pravin Gordhan and the Public Protector’s State of Capture report  as “demonstrating transparency” in the country.

Politics hampers SOE restructure

Brixiova said political tensions impeded key structural reforms such as comprehensive reforms of state-owned enterprises (SOE), "which are yet to take place”.

In addition Brixiova said "continued guarantees to loss-making SOEs such as South African Airways (SAA) point to avoidance of difficult structural reforms".

"Questions regarding funding risks to several large SOEs have risen after Futuregrowth, one of South Africa's fixed-income asset managers, suspended new loans and roll-overs of the existing debt to these entities.

"While systemic funding risk for SOEs is a tail risk representing a highly unlikely outcome that is far from our baseline scenario, we observe a gradual build up of fiscal risks stemming from the lack of progress with SOE reforms and related contingent liabilities."

READ: Warts and all, rating agencies kept SA on straight and narrow

However, Brixiova said "there have been positive developments in state-owned entity governance and management, such as the appointment of new boards at SAA and South African Post Office".

“In August 2016, a new Presidential Coordinating Council on State-Owned Enterprises was formed, with a mandate to coordinate and monitor SOEs.

“Last October's cabinet meeting approved rules on SOE governance, such as the appointments of boards of directors.”

"Still, responsibilities and links are not clear between this new council chaired by the President and the interministerial committee already in place and chaired by the Deputy President."

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