New York, November 06, 2014 -- Moody's Investors Service has today downgraded the government of
South Africa's debt rating to Baa2 from Baa1. The government's
short-term debt rating is affirmed at a provisional Prime-2
((P)P-2). The outlook on the rating was changed to stable
from negative. Moody's also downgraded to Baa2 from Baa1 the rating
assigned to the debt issued by ZAR Sovereign Capital Fund Propriety Limited.
The key drivers of the rating downgrade are the following:
1) Poor medium-term growth prospects due to structural weaknesses,
including ongoing energy shortages as well as rising interest rates,
further deterioration in the investor climate and a less supportive capital
market environment for countries such as South Africa that are highly
dependent on external capital.
2) The prospect of further rises in the government debt-to-GDP
ratio implied by the low-growth environment, which even strict
compliance with the government spending ceiling and somewhat smaller fiscal
deficits are unlikely to arrest in the near term.
The assignment of a stable outlook reflects policymakers' commitment
to reining in government debt growth over the medium term and the broad
political support for a macroeconomic strategy, including the National
Development Plan (NDP), tighter monetary policy and fiscal restraint,
which should help stabilize the debt burden over the medium term.
In a related decision, South Africa's country ceilings for
local currency debt and deposits remain at A1/P-1 and its country
ceilings for foreign currency debt remain at A2/P-1. The
long-term country ceiling for foreign-currency bank deposits
was lowered to Baa2 from Baa1 while the short-term country ceiling
for foreign currency bank deposits was unchanged at P-2.
RATINGS RATIONALE
- RATIONALE FOR THE DOWNGRADE TO Baa2
The first driver for the downgrade of South Africa's long-term
debt rating to Baa2 is the weak outlook for real growth over the coming
years, continuing the below-potential performance of 2012-14.
Moody's has revised down its forecasts for real GDP growth to only
1.4% in 2014, followed by a 2.5% increase
in 2015, and expects that the economy will not reach its long-run
potential growth rate of roughly 3% until 2018 because of ongoing
energy shortages and other structural constraints. These low projections
are also subject to material downside risks from both domestic sources
-- mainly new strike activity -- and external sources,
particularly a slowdown in demand from China, South Africa's
single largest export market, and weak growth in world trade generally.
Even if such impediments are overcome, real growth is likely to
come in below levels seen a few years ago, according to Moody's.
The country's structural weaknesses are meant to be addressed in
the NDP, but will likely continue to hold back growth for a number
of years. For example, while the development of South Africa's
energy and transportation infrastructure is a key focus of the NDP,
energy availability will remain challenging until at least mid-2017,
when substantial new electricity generation capacity will come fully on
stream. Since South Africa's exports are highly energy-intensive,
shortfalls in electricity availability suggest that the current account
deficit will remain at relatively wide levels of around 5.5%
of GDP for several more years. Other essential elements of the
NDP -- labor market reform and reforms to improve education standards
aimed at raising the country's very low participation rate and normalizing
industrial relations -- are important drivers of potential growth
in the coming years, though as yet unproven.
South Africa's structural weaknesses are also a major factor behind
the poor investment climate, which has been exacerbated by the extensive
work days lost to strikes in recent years and heightened tensions over
a multitude of socio-economic challenges still impacting the country
20 years after the democratic transition. Lagging investment has
hindered efforts to raise growth to the 5%-6% level
needed to reduce unemployment and raise real incomes as well as increasing
the savings rate to levels needed to support higher levels of growth without
exacerbating external imbalances. South Africa's weakened
investment climate is particularly relevant in view of the less supportive
capital market environment for South Africa and other countries that depend
on capital inflows to finance large current account deficits.
Moody's says growth will also be vulnerable to the expected rise
in policy rates as the Reserve Bank (SARB) gradually normalizes real rates
into positive territory. Rates have been on hold in recent months
as the pass-through from the depreciation of the rand since last
May has been weaker than expected. When interest rates do rise,
however, it will negatively affect lower-income households
in particular, who are heavily indebted.
The second driver of the downgrade to Baa2 is the continued deterioration
in the government's debt metrics that will likely occur in the next
few years, even if, as Moody's expects, the government
adheres to its announced expenditure ceilings. The debt burden
has risen by about 20 percentage points to an estimated 48% of
GDP this year, and debt affordability has diminished consistently
since 2008/09. Although the government has stepped up its fiscal
consolidation efforts to take account of lower growth in coming years,
recurring fiscal deficits combined with weak growth will lead to a continued
increase in its gross debt to nearly 50% of GDP by 2017/18,
even according to official forecasts. Interest payments are the
fastest-growing item in the budget, and Moody's projects
that the interest-to-revenue ratio will continue to rise
to 9% in 2015/16, from a low of 7.1% in 2008/09.
- RATIONALE FOR CHANGING THE RATING OUTLOOK TO STABLE
Moody's decision to change South Africa's rating outlook to
stable from negative reflects policymakers' commitment to containing
increases in government deficits and debt. According to Moody's,
government efforts to restrict current spending -- including the
wage bill -- to protect its infrastructure expansion efforts are
an important part of its broader efforts to enhance longer-term
growth prospects by eliminating infrastructure bottlenecks without significantly
loosening fiscal policy.
The recent Medium Term Budget Policy Statement provided further assurance
of continuity in macroeconomic policy and showed that the South African
Treasury is no longer counting on a recovery of growth to bring down deficits
in the future. Aside from cuts in the existing spending ceilings
for 2015/16 and 2016/17, the statement outlines newly-lowered
fiscal deficits that are limits that cannot be exceeded, which Moody's
deems as important given downside risks to growth on both the domestic
and external fronts.
Moreover, Moody's noted that South Africa's Baa2 investment
grade rating reflects its position as the most developed country in Africa,
offering by far the deepest capital market and one of the most sophisticated
financial systems among emerging markets. The economy has a diversified
productive base, with substantial value-added from domestic
sources. The country's infrastructure is highly advanced
compared with most other emerging markets and its institutions,
most notably its judiciary, are stronger than many of its peers.
Twenty years after the democratic transition, important achievements
include the early establishment of macroeconomic policy credibility;
an expansion of services, housing and utilities; and the emergence
of a growing black middle class.
- WHAT COULD CHANGE THE RATING UP/DOWN
The successful implementation of planned structural reforms to enhance
potential growth and reduce exposure to external shocks, combined
with continued fiscal prudence, could exert upward pressure on the
rating. Reforms resulting in higher domestic savings and investment
rates and sustainable, stronger growth, alongside continued
restraint in public debt accumulation and the ongoing implementation of
the macro- and micro-level reforms embedded in the NDP,
could also provide positive momentum to the rating.
South Africa's ratings could be downgraded if the official commitment
to fiscal consolidation and debt stabilization falters, or if the
investment climate deteriorates further, imperiling the availability
of external financing for the current account deficit.
GDP per capita (PPP basis, US$): 12,507 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.9% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.3%
(2013 Actual)
Gen. Gov. Financial Balance/GDP: -4%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.8% (2013 Actual)
(also known as External Balance)
External debt/GDP: 38.9% (2013 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 04 November 2014, a rating committee was called to discuss the
rating of the South Africa, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Alastair Wilson
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades South Africa to Baa2; outlook changed to stable
