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No change in South Africa's credit rating - Moody's

Nov 26 2016 07:34

Cape Town - South Africa has retained its sovereign credit rating, Moody's Investors Service announced late on Friday.

The current rank assigned by Moody’s is two notches above sub-investment grade, with a negative outlook.

READ: FULL STATEMENT - Moody's affirms SA's credit rating

"The negative outlook on South Africa's Baa2 government bond rating reflects risks related to the implementation of structural reforms aimed at restoring confidence and encouraging investment, upon which Moody's bases its expectations for a gradual growth recovery and debt stabilization in coming years," said Moody's in a statement.

"The negative outlook also recognises the downside risks associated with political uncertainty and low business confidence as well as the challenging external environment characterised by low growth, investment and trade," said Moody's.

Moody's warned that if South Africa doesn't accelerate economic growth, the country risks being downgraded.

The South African Reserve Bank has forecast that the country's growth will top just 0.4% in 2016 and only accelerate beyond 1% in 2017 and 2018.

"South Africa's rating would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium term growth. 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," said Moody's.

"While a rating upgrade is unlikely, Moody's 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 labor markets, electricity, and state-owned enterprises would be credit positive," said Moody's.

South Africa dodged a downgrade to “junk status” in both May and June.

Rating agencies have been sympathetic towards South Africa’s current lack of economic growth, influenced by weak external demand, which has had an impact on exports, as well as the drought, said Renier de Bruyn, equity analyst at Sanlam Private Wealth.

A credit rating reflect the borrower’s credit worthiness. That is the likelihood that the borrower will pay back a loan within the confines of the loan agreement, without defaulting, explained Mampho Modise, a post graduate researcher at the University of Pretoria.

Junk status is associated with high risk and therefore, high borrowing costs. This is the main reason why a sovereign has to avoid being downgraded into a junk, or sub-investment grade, Modise stated in an interview published by The Conversation.

Meanwhile, on Friday, ratings agency Fitch also revised its outlook for South Africa to negative but it kept its rating unchanged for the country at BBB-.

READ: Fitch cuts South Africa's outlook to negative

Fitch said issues such as political risks, standards of governance and policy-making need to be addressed.

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