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Moody's credit downgrade likely

Sep 16 2016 10:46
Liesl Peyper

Cape Town – South Africa will in all likelihood receive a credit downgrade from rating agency Moody’s, the agency said in a credit opinion note. 

“We would likely downgrade South Africa’s rating in the absence of growth recovery and more fundamental structural reforms that put the economy on a high and sustainable growth path.” 

Moody’s wants to see reform in among others the governance of state-owned enterprises, labour market flexibility and better market competition in network sectors.

Despite the 3.3% gross domestic product growth recorded in the second quarter of 2016, Moody’s is of the view that South Africa’s GDP growth will “nearly stagnate” at 0.2% for the whole of 2016, before recovering to 1.1% in 2017 and 2% in 2018. 

On Wednesday Moody’s placed Eskom, the South African National Roads Agency, the Industrial Development Corporation, the Development Bank of Southern Africa and the Land Bank on review for a downgrade citing concerns about funding sources, governance and the unstable political environment.

READ: Downgrade risk: Eskom, Sanral, DBSA, IDC and Land Bank

Economists have singled out the reform of state-owned enterprises as key to avoiding a credit rating downgrade, because economic expansion is constrained without the infrastructure these entities provide. 

READ: Reform of state-owned enterprises key to avoid downgrades - economists

But the recent public spat between National Treasury and state-owned entities Eskom, Denel and South African Airways, as well as allegations of corruption at entities such as the Passenger Rail Agency South Africa, have dented confidence among investors and credit ratings agencies. 

According to Moody’s, South Africa’s resource-rich and resilient economy is countered by “growth that has been too slow for too long”. 

Prospects for a gradual recovery and medium-term growth are reliant among other things on “improved incentives for small and medium enterprises”, Moody’s said. 

Earlier this year, South Africa staved off a credit rating downgrade from Moody’s, Standard & Poor’s and Fitch, although all three agencies said sluggish growth and economic uncertainty were worrying factors. 

In May, Moody’s affirmed South Africa’s credit rating at Baa2 – two notches above junk, while keeping the outlook negative. 

Both Fitch and S&P left the credit rating at BBB- in June, one level above junk.

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