Cape Town - Rating agency Moody’s on Friday downgraded the country’s long-term foreign and local currency debt ratings by one notch from Baa2 to Baa3, with a negative outlook, keeping it at investment grade.
The key drivers for the downgrade were the weakening of South Africa's institutional framework, reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms, and the continued erosion of fiscal strength due to rising public debt and contingent liabilities, Moody's vice president Zuzana Brixiova said in a statement on Friday.
Economists had expected a downgrade to one notch above junk status, while keeping the outlook negative on the back of low growth concerns, policy uncertainty and fiscal slippage.
The rand didn't show too much movement after the announcement and was trading 0.07% weaker at R12.93 to the dollar at 22:50 on Friday.
FULL STATEMENT: Moody's downgrades SA
Reports of the recession this week merely would have reinforced Moody's decision to downgrade the country, said Dr Azar Jammine, chief economist at Econometrix.
Earlier this year, following the Cabinet reshuffle where President Jacob Zuma replaced former Finance Minister Pravin Gordhan with former Home Affairs Minister Malusi Gigaba, the ratings agency placed South Africa on review for a downgrade. At the time both Fitch and S&P downgraded the foreign currency rating to junk status.
Moody’s was concerned that the move would impact the progress on reforms necessary to sustain the country’s fiscal and economic strength, as well as the effectiveness of policy-making institutions, Fin24 reported.
Moody’s was also concerned over the implications for growth and public debt as well as the impact on investor confidence.
The finance minister had met with both S&P and Moody’s in May in an effort to avoid another downgrade, Bloomberg reported.
Fitch raised concerns over low economic growth which poses a risk for fiscal consolidation and rising contingent liabilities. While S&P listed policy continuity and the ability of the country to reduce economic inequalities in the medium term, among other reasons for its decision.
S&P pointed out that the flexibility of the monetary policy was a strength.
Moody's vice president Zuzana Brixiova said that "recent events, particularly but not exclusively the abrupt March Cabinet reshuffle, illustrate a gradual erosion of institutional strength".
"The institutional framework has become less transparent, effective and predictable, and policymakers' commitment to previously-articulated reform objectives is less certain.
"Moody's views the underlying political dynamics which led to the March cabinet reshuffle as posing a threat to near- and medium-term real GDP growth.
Lower levels of growth and heightened uncertainty about policy direction and policymakers' commitment to structural reforms have increased the risk of a weakening of the government balance sheet."
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