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Moody's places SA on downgrade review as S&P takes action

Cape Town - Moody’s Investors Service, which rates South Africa's investment grade at two levels above junk with a negative outlook, said on Monday the rating is under review for a downgrade.

Moody's said in a statement late on Monday it has placed the Baa2 long-term issuer and senior unsecured bond ratings of the government of South Africa on review for downgrade, a decision the ratings agency said was prompted by the abrupt change in leadership of key government institutions.

Earlier on Monday S&P, citing similar reasons, cut South Africa's foreign-currency rating to BB+, the highest junk score, and warned that a deterioration of the country's fiscal and macroeconomic performance could lead to further reductions.

The local-currency rating was reduced to BBB-, still investment grade, from BBB.

READ: Investec CEO: 14 months of work to safeguard SA from junk wiped out

Moody's said President Jacob Zuma's massive Cabinet reshuffle shortly after midnight on Friday, which claimed the jobs of former finance minister Pravin Gordhan and his deputy Mcebisi Jonas, has raised questions regarding the progress on reforms previously identified as essential to sustain South Africa's fiscal and economic strength, and the effectiveness of South Africa's policy-making institutions.

It also raised questions about the more immediate implications for growth and public debt given the potentially negative impact on fragile domestic and external investor confidence, Moody's said.

"The review will allow Moody's to assess these risks and if the changes in leadership signal a weakening in the country's institutional, economic and fiscal strength."

On March 31, Zuma changed the  top leadership in 10 ministries, including in key portfolios such as finance and energy.

Gordhan and Jonas were replaced respectively by former home affairs minister Malusi Gigaba and ANC MP Sfiso Buthelezi.

In the energy portfolio, former minister Tina Joemat-Pettersson has been replaced by Cabinet newcomer Nkhensani Kubayi.

Moody's said changes within a government do not generally signal material changes in a country's credit profile. "Here, however, the timing and scope of the reshuffle raises questions over the signal they send regarding 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.

The rand plummeted to R13.74/$ on the S&P announcement before settling to close at R13.68 in New York, just to weaken again by 23:55 to R13.70 on the Moody's announcement.

Moody's said it will assess any announced or likely changes in the government's plans and the implications for potential growth and hence for the reversal of the rising debt burden.

Moody's will also assess any implications for progress on currently stalled structural reforms in strategic areas such as regulation of the mining sector or regulations that would increase transparency in the financial transactions of large businesses; and the prospects for continued progress on reforms to enhance transparency, accountability and good
governance in the SOE sector, and to remove structures that encourage rent-seeking over achievement of public policy goals.

The review will also explore the implications of the underlying political dynamics which led to the changes in ministerial appointments, said Moody's.

"The strength of South Africa's institutions has been historically an important source of support to the creditworthiness of the country, nurturing a policy framework that has generally been effective in containing fiscal and macroeconomic
imbalances.

"Moody's intends to use the review to determine whether the ongoing tensions within the ANC weaken the credibility and effectiveness of South Africa's policy-making, the effectiveness and independence of the public service and ultimately the strength of the country's institutions."

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