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Johannesburg – Moody’s decision to place the country’s sovereign rating under review for a downgrade has subsequently led to 13 sub-sovereigns been placed under review too.
Following the Cabinet reshuffle last week, which saw President Jacob Zuma replacing Finance Minister Pravin Gordhan with Former Home Affairs Minister Malusi Gigaba, the ratings agency listed the potential weakening of the South African government's credit profile and it’s institutional, economic and fiscal strength among the reasons, according to a statement it issued on Monday night.
READ: Moody's places SA on downgrade review as S&P takes action
South Africa is currently rated two notches above junk status at Baa2 with a negative outlook. A downgrade would see it at Baa3. Stanlib chief economist Kevin Lings said it is likely Moody’s will downgrade the sovereign, with a negative outlook.
However, Standard & Poor’s had downgraded South Africa from BBB- to BB+, or sub-investment grade.
In a statement issued on Tuesday, the ratings agency explained it has placed 10 South African regional and local governments (RLGs) and three government-related entities (GRIs) under review for downgrade.
These include the short term ratings of City of Cape Town, Metropolitan Municipality of Ekurhuleni's and City of Johannesburg. The South African National Roads Agency (Sanral) is also included,a s weak cash flows would impact the agency’s finances.
The conclusion of this review highly depends on Moody’s decision of the sovereign rating.
“The decision to place the ratings of 10 regional and local governments and three government-related issuers on review for downgrade reflects the close operational and financial linkages between the national government and municipalities,” said Moody’s.
“Large cities are exposed to the country's macroeconomic performance and socio-economic conditions to varying degrees, while small- to medium-sized municipalities are highly reliant on government transfers for operations and capital investments.”
The ratings agency added that “current headwinds” in the economy with a projected GDP growth of 1% for 2017, protracted political tensions impacting policy uncertainty will put pressure on the financial performance of metropolitan cities.
“In addition, metropolitan cities feature moderate-to-high debt levels, which add rigidity to their budgets.”
ALSO READ: Rand gains as Moody's delays SA's credit rating
Moody’s explained that a downgrade would likely result if the sovereign credit profile weakens. “Further financial difficulties resulting in cash-flow pressures, consistently high or growing debt levels could lead to downward rating actions independent of sovereign rating movements,” added Moody’s.
An upgrade is likely in the case that the sovereign credit profile strengthens as well as, “evidence” of an entity’s ability to withstand the deterioration of the operating environment.
