Moody’s downgrades SA amid uncertainty ahead of Mangaung

2012-09-27 16:10

Moody’s has downgraded South Africa’s credit rating by one notch, citing concerns about the government’s ability to tackle economic problems as well as political jostling ahead of Mangaung.

The drop to a Baa1 rating will likely spell higher borrowing costs for Africa’s largest economy, reports AFP.

The main driver of the downgrade “is Moody’s lowered assessment of institutional strength to ‘moderate’ from ‘high’, an important factor in the rating agency’s judgment of a sovereign’s economic resiliency,” the rating agency said in a statement.

The outlook remains negative.

The downgrade occurred because Moody’s does not believe the state has as much capacity to solve the countries socio-economic challenges as they first thought, said Peter Attard Montalto, director and emerging markets economist at Nomura International.

“They also highlight the limited room for fiscal movement and deteriorating debt metrics and low rates together with a negative FDI climate.”

Montalto told Fin24 the downgrade came much earlier than they’d expected. “We thought they would wait till after Mangaung in December but they keep the rating on negative given the possible policy outcomes of that elective conference.”

He added that the government has underestimated the potential for a downgrade, instead focusing on banking stability and the fiscal outlook.

“While Moody’s does mention fiscal here, the key change is around the state’s capacity to solve societies problems. We have said for some time it would be this and SA’s socio-economic challenges that would lead to a downgrade, not things like debt sustainability.

“As the strikes in South Africa spread both within the mining industry and elsewhere in the economy, we think the prospect for further downgrades from other agencies remains very high, and for that likelihood to rise yet further after Mangaung where the policy direction has the potential to entrench further policies which harm competitiveness like further state involvement in the economy, mining taxes etc.

“Our original view that a downgrade on a Zuma victory is more likely than on a Motlanthe victory in this context still stands for the other agencies and with respect to Moody’s cutting again,” said Montalto.

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