ALERT: South Africa is on Moody's watch list

Lameez Omarjee

Johannesburg – South Africa narrowly dodged a downgrade to sub-investment near the end of last year, but it is still on Moody’s “watch list”. Other countries on the list  include Britain, Italy China, Mexico and Brazil.

Moody’s kept South Africa’s sovereign rating two notches above sub-investment grade at Baa2, with a negative outlook. Moody’s is set to publish reviews again on 7 April, 11 August and 24 November this year.

In an interview with Reuters, Alastair Wilson, Moody's managing director of sovereign risk commented on the impact of political uncertainty. "Certainly it's fair to say (political) noise has risen in recent months, but that isn't necessarily significant from a credit perspective.”

The fact that fraud charges against Finance Minister Pravin Gordhan were dropped was also a sign of South Africa’s institutional strength, he added.

In its previous review on 25 November 2016, the ratings agency highlighted that government met its expenditure ceiling. However the slow economic growth and rising contingent liabilities given government guarantees to state-owned enterprises still pose risks. 

The assigned negative outlook is mainly as a result of political uncertainty, low business confidence and risks to the implementation of structural reforms that could restore investor confidence.

READ: Moody's on SA fiscal consolidation and public debt trajectory

In a report on South Africa’s economic overview for 2017, Nomura emerging markets economist Peter Attard Montalto said that’s there are expectations for politics to remain noisy. But he added that South Africa does not pose as much a risk as Turkey.

Markets will be focusing on when a downgrade to sub-investment grade would happen. The uncertain political landscape and lack of reforms continue to drag down positive per capita income growth, Montalto stated.

Nomura is of the view that Moody’s may downgrade South Africa's rating by mid-year. Fitch may possibly downgrade South Africa to junk status by the end of 2017, Standard and Poor’s (S&P) may do so by mid-year.

Moody’s previously stated that 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 would also put downward pressure on ratings.

ALSO READ: Radebe lauds 'Team SA' for dodging downgrade

Last year, during the final briefing from Cabinet, Minister in the Presidency Jeff Radebe said that the work by Team SA to avoid a downgrade would continue in 2017.

“Team SA, which was appointed by the president, has not stopped work. It will continue. The partnership is very valuable to the government.

“Government, business, labour and all of us need to put our shoulder to the wheel so that we should not have a downgrade,” he said at the time.

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