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Moody’s lists 7 key events as it frets over SA’s institutional strength

Cape Town – Moody’s, which did not publish a ratings review of South Africa on Friday as was widely anticipated, on Wednesday listed seven recent key events as it warned of a gradual erosion of the nation’s institutional strength.

“Recent events, particularly but not exclusively the abrupt March Cabinet reshuffle as well as attempts by the Public Protector to alter SARB's mandate, illustrate a gradual erosion of institutional strength,” it said in a regular update on the country.

“Over time, the institutional framework has become less transparent, effective and predictable, and policymakers’ commitment to previously articulated reform objectives is less certain.”

Moody's has South Africa's long-term foreign and local currency debt ratings at Baa3, with a negative outlook. It is the only rating agency that has South Africa’s foreign-currency and rand-denominated debt at investment grade.

On June 9, Moody’s downgraded South Africa’s credit ratings, some two months after both Standard & Poor’s and Fitch had downgraded the foreign currency rating to junk status, following a far-reaching Cabinet reshuffle at the end of March.

The negative outlook reflects the view of Moody’s that the risks to growth and fiscal strength arising from the political outlook are tilted to the downside, the rating agency said on Wednesday.

“It is unlikely that a political consensus will emerge which supports investment in the economy and reinvigorates the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the government’s balance sheet. The opposite scenario, of heightened political dysfunction, continued gradual institutional weakening and diminished clarity over policy objectives, has a higher likelihood.”

The seven events:

1. Abrupt Cabinet reshuffle has further reduced business confidence

“The timing and scope of the reshuffle raised questions over the motive and the prospects for ongoing reforms, the underlying strength of South Africa’s institutional framework, and the fragile recovery in the country’s economic and fiscal position. Following the reshuffle, cooperation between government, labour, and business has been weakened and trust eroded.”

2. Political tensions within the ANC are rising in the run up to leadership elections

“The results (of last week’s motion of no confidence) reflect the rising political tensions within the ruling party in the run up to the leadership conference of the African National Congress (ANC) in December 2017. The credit impact of the result is subdued as the long-term weaknesses in growth, financial situation of state-owned enterprises, and business confidence, as well as continued uncertainties surrounding policy making, remain unchanged. Investment is likely to remain low until a more stable political situation and policy environment emerge.”

3. Growth is underwhelming and unemployment rate the highest since the global financial crisis

“A modest emergence from recession is expected in growth results for the second quarter of 2017, after the South African economy contracted 0.7% q/q in the first quarter of 2017 following a 0.3% q/q contraction in the fourth quarter of 2016. Even though the mining sector has been exhibiting a continued cyclical recovery, taking into account heightened policy uncertainty and the lack of structural reforms we have reduced our forecast of real GDP growth to 0.5% in 2017 and 1.2% in 2018. Unemployment, which has recently reached the highest level since the global financial crisis and shows wide differences across ethnic groups, is also projected to remain elevated.”

4. Revised Mining Charter draws dispute within the mining sector

“The new charter elicited a sharp response from the mining sector, and ultimately led to the new charter being put on hold, as the Chamber of Mines moved to interdict the charter in court. Continued uncertainty regarding key legal and regulatory underpinning of South Africa’s mining sector will further delay new investment in the sector and will prevent it to benefit fully from the current cyclical upturn."

5. Long-awaited FICA bill approved

“The Financial Intelligence Centre Amendment (FICA) bill … aims to combat illicit financial activities in accordance with international standards. The bill will support the elimination of financial crimes such as tax evasion and money laundering, among others. The President originally rejected the approval of the bill last year due to concerns that some provisions may breach the Constitution.”

6. SARB cuts rates as inflationary expectations fall and growth remains below potential

“In July, SARB's Monetary Policy Committee cut its policy rate by 25 bps to 6.75%. The cut, which was SARB's first in five years, constituted an important reversal in SARB's monetary policy stance. While the rate cut coincided with political pressures on the SARB's mandate and independence, it has been justified by economic circumstances. The decision occurred in the context of better than expected inflation data, well-anchored inflationary expectations, and low growth. It should support aggregate demand, near-term growth as well as fiscal consolidation. However, without decisive structural reforms longer-term potential growth and the fiscal outlook will remain subdued and continue to be a source of credit pressure.”

7. Recent bailout of SAA points to ongoing financial challenges of state-owned enterprises

“In early July, the National Treasury provided R2.3bn to South African Airways (SAA) for it to be able to repay a loan to Standard Chartered Bank. Other SAA loans amounting to about R6.7bn also matured but the airline managed to get these rolled over through negotiations. While the amount of the bailout was small (less than 0.1% of GDP), it happened in an environment of very weak business confidence. While conditions aimed at improving SAA's performance were not attached to the bail-out, the National Treasury has recently appointed a new CEO with a view to strengthen SAA's governance and financial situation. The Treasury has also started engaging other government departments on the Private Sector Participation framework as a part of broader SOE reforms.”

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