Moody's leaves South Africa teetering on brink of 'junk'

The city of Johannesburg over looks the Mandela bridge, with trains parked underneath, South Africa, November 15, 2018. [REUTERS/Siphiwe Sibeko]

Moody’s has left South Africa on the brink of “junk” status after it revised the outlook on the country’s last investment-grade credit rating to “negative,” last week, piling pressure on President Cyril Ramaphosa to quicken the pace of reform.

Moody’s said the outlook revision on its ‘Baa3’ rating, the lowest rung of investment grade, was motivated by deterioration in the economic growth outlook and rising debt.

Analysts had expected the move after a bleak mid-term budget statement this week that slashed this year’s growth forecast to 0.5 per cent and showed government debt racing to more than 70 per cent of gross domestic product by 2023.

The Rand tumbled more than 2.5 per cent over the past week against the dollar, its sharpest weekly drop since early August. Yields on local 10-year government bond issues traded on Monday at just over eight per cent but climbed as high as 8.6 per cent following the dire budget predictions.

The negative outlook means there is a window of 12-18 months in which a downgrade could be delivered, but it could come sooner if Moody’s isn’t impressed by the fiscal picture presented at the next budget statement in February.

“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level,” Moody’s said in a statement after South African financial markets had closed.

It added that its new outlook reflected rising concern that the government would not find “the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth”.

The finance ministry responded by saying the country had “a narrow window to demonstrate faster and concrete implementation of reforms”.

Ramaphosa has struggled to revive Africa’s most advanced economy since taking over from scandal-plagued Jacob Zuma in February 2018. The wave of optimism among foreign and local investors that accompanied his rise to power has fizzled out as economic challenges rise.