‘Markets saw Moody’s downgrade coming’

2014-11-07 18:40

Financial markets expected Moody’s Investors Service (Moody’s) downgrade of the South African government’s debt rating, says Investec.

“The Moody’s downgrade was expected, as typically the agency keeps SA’s rating one notch above the rating of either Fitch and/or [Standard & Poor’s] depending on which has the lowest rating for SA,” said economist Annabel Bishop today.

“The rand was about 12 cents weaker against the US dollar after the downgrade, but only five cents weaker against the euro and UK pound, implying most of the rand’s weakness against the US dollar is due to US dollar strength.”

This indicated the markets had expected the downgrade.

“Moody’s rating aligns with Fitch which has SA on a sovereign rating of BBB-,” said Bishop.

“However, Fitch has a negative outlook on SA and could downgrade its rating to BBB- in early December. South Africa now holds a two-tiered rating, Baa2 from Moody’s, BBB from Fitch, and BBB- from S&P.”

Yesterday, in a statement released on Moody’s website, the agency said it had downgraded the South African government’s debt rating to Baa2 from Baa1.

“The government’s short-term debt rating is affirmed at a provisional prime -2 ((P)P-2),” said Moody’s.

“The outlook on the rating was changed to stable from negative.”

There were two primary reasons for the rating downgrade.

The first was poor medium-term growth prospects, due to structural weaknesses.

This included ongoing energy shortages, rising interest rates, investor climate deterioration, and a less supportive capital market environment for countries like South Africa, which were highly dependent on external capital.

The second reason was the prospect of further rises in the government debt-to-GDP ratio implied by the low-growth environment.

“Even strict compliance with the government spending ceiling and somewhat smaller fiscal deficits are unlikely to arrest in the near term,” said Moody’s.

Bishop said Investec’s economic scenarios contained one rating downgrade from each agency, as well as significantly higher interest rates, recession, and marked rand weakness.

“It is key that Moody’s said part of the reason for the downgrade is expected higher interest rates in South Africa,” she said.

“In particular Moody’s believes economic growth will be vulnerable in South Africa as the Reserve Bank increases interest rates gradually, particularly affecting low-income earners.”

Investec believed this was “absolutely key” as economic demand was subdued in South Africa and inflation was falling.

“We remain of the view interest rates will remain unchanged in November, with not more than a 75bp [basis point] hike in 2014, and the potential for 50bp of the 75bp not to materialises if economic growth remains weak.”

Join the conversation!

24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

We reserve editorial discretion to decide what will be published.
Read our comments policy for guidelines on contributions.

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
Comments have been closed for this article.

Inside News24


Book flights

Compare, Book, Fly

Traffic Alerts
There are new stories on the homepage. Click here to see them.


Create Profile

Creating your profile will enable you to submit photos and stories to get published on News24.

Please provide a username for your profile page:

This username must be unique, cannot be edited and will be used in the URL to your profile page across the entire 24.com network.


Location Settings

News24 allows you to edit the display of certain components based on a location. If you wish to personalise the page based on your preferences, please select a location for each component and click "Submit" in order for the changes to take affect.

Facebook Sign-In

Hi News addict,

Join the News24 Community to be involved in breaking the news.

Log in with Facebook to comment and personalise news, weather and listings.