London, 24 November 2017 -- Moody's Investors Service has today placed the Baa3 long-term issuer
and senior unsecured bond ratings of the government of South Africa on
review for downgrade.
The decision to place the rating on review for downgrade was prompted
by a series of recent developments which suggest that South Africa's
economic and fiscal challenges are more pronounced than Moody's
had previously assumed. Growth prospects are weaker and material
budgetary revenue shortfalls have emerged alongside increased spending
pressures. Altogether, these promise a faster and larger
rise in government debt-to-GDP than previously expected.
The review will allow the rating agency to assess the South African authorities'
willingness and ability to respond to these rising pressures through growth-supportive
fiscal adjustments that raise revenues and contain expenditures;
structural economic reforms that ease domestic bottlenecks to growth;
and improvements to SOE governance that contain contingent liabilities.
The review period may not conclude until the size and the composition
of the 2018 budget is known next February. This will also allow
Moody's to assess the policy implications of political developments
during the review period and the likelihood of pressures on South Africa's
key policymaking institutions persisting.
In the meantime, South Africa maintains credit strengths that still
support its Baa3 rating. These include deep domestic financial
markets and a well-capitalized banking sector; a well-developed
macroeconomic framework; and low foreign currency debt. Adherence
to the Constitution and the rule of law continue to be the key pillars
of strength of South Africa's institutions.
South Africa's (P)Baa3 Senior Unsecured Shelf and MTN program ratings
were also placed under review for downgrade, as was the (P)P-3
Short-Term rating. In a related rating action, Moody's
has also placed on review for downgrade the Baa3 backed senior unsecured
rating of the ZAR Sovereign Capital Fund Propriety Limited.
South Africa's long-term local-currency bond and bank deposit
country ceilings remain unchanged at A2. The long-term and
short-term foreign currency bond ceilings remain unchanged at A3/P-2,
respectively. The long-term foreign-currency bank
deposits ceiling stays at Baa3, while the short-term foreign-currency
bank deposits ceiling remains unchanged at P-3.
RATINGS RATIONALE
RATIONALE AND FOCUS OF THE REVIEW FOR DOWNGRADE
SLOWING GROWTH, REVENUE SHORTFALLS, RIGID WAGE BILL AND RISING
BORROWING COSTS POSE CHALLENGES TO FISCAL CONSOLIDATION
The recently published Medium Term Budget Policy Statement (MTBPS) set
out how the challenges facing the South African government in its efforts
to contain the rise in public debt while enhancing medium term growth
have risen since the rating action in June. Growth this year and
next is forecast to be lower than was expected in June. While revenue
growth outperformed nominal GDP growth between 2011 - 2015,
revenues have materially undershot forecasts this year and are expected
to continue to do so. At the same time, lower growth and
rising poverty will magnify upward pressure on expenditures.
As a consequence, the country's government debt burden has
increased by about one third since 2011, and will continue to rise
due to relatively high deficits driven by revenue shortfalls, the
government's rigid wage bill and rising borrowing costs.
Unless a timely and effective policy response is implemented, debt-to-GDP
will reach 60% by 2020/21 and continue to rise afterwards.
That contrasts with Moody's earlier projections, from June
2017, that debt would reach about 55% of GDP in 2018/19 fiscal
year and continue to rise but very gradually. Moody's has
also lowered its growth forecast to 1.2% for 2018 and 1.7%
for 2019 (from June projections of 1.5% in 2018 and 2.2%
in 2019).
Several risks, if materialized, would lead to even faster
debt accumulation than envisaged in the MTBPS. Those include risks
stemming from the existence of high and concentrated contingent liabilities
to creditors of state owned enterprises (SOEs), some of which are
becoming increasingly reliant on public funding for sustaining their operations.
The MTBPS did not set out what measures would be taken to address the
additional fiscal pressures. While we understand that the National
Treasury has identified a set of revenue- and expenditure-based
measures which would meet the funding gap in 2018/19 and 2019/20 fiscal
years and limit the rise in debt somewhat, those measures have not
been approved by the cabinet and will only be announced when the 2018
budget is published in February. So it remains unclear what assurance
should be taken from the government's stated commitment to reduce
the funding gap. Moody's also recognizes that fiscal consolidation
will be increasingly challenging without revived growth.
The review will allow Moody's to assess the effectiveness of the
government's policy response to these rising fiscal challenges,
while mitigating the negative impact of fiscal consolidation on growth.
It will also allow Moody's to assess further steps taken to improve
the governance and stabilize the financial position of SOEs. The
2018 budget next February will be an important policy document,
setting out the government's plan to respond to the country's
economic and fiscal challenges. Unless other events bring greater
clarity in advance of that date, the rating agency will likely conclude
its review for downgrade in the month following the tabling of the 2018
budget.
GROWTH PROSPECTS REMAIN DIM IN AN UNCERTAIN POLITICAL ENVIRONMENT
Low growth lies at the heart of South Africa's fiscal problems.
Growth has consistently underperformed expectations over recent years,
undermining the government's efforts to meet its deficit targets.
More recently, revenue shortfall in combination with rising poverty
and unemployment, low growth has increased pressures on expenditures.
In the current political environment, that pattern shows little
sign of ending, and has been amplified by questions about the capacity
of the South Africa's Revenue Service (SARS) to collect revenues
effectively.
Near-term growth prospects remain constrained by low investor confidence.
Rising uncertainty over near- and medium-term policy priorities
has brought investor confidence to the lowest level since 2009.
Investment fell by 3.9% in 2016 and continued to decline
through 2017. Investment levels are likely to remain low until
a more stable and investment friendly policy environment emerges.
Low investment will limit South Africa's growth over the medium-term.
Potential growth also continues to be constrained by halting progress
on structural reforms, including on the structure and regulation
of the mining sector, on the governance of SOEs, and on plans
to reform the educational system to close the persistent skill gap.
Both low investor confidence and limited progress on structural reforms
are rooted in the uncertainty created by the fluid and unpredictable political
environment. That environment is reflected in the current lack
of clarity over the government's fiscal plans. Unclear and
shifting policy objectives, political maneuvering and frequent changes
of leadership in key ministries, and concerns over the pressures
on the key policymaking institutions such as the Reserve Bank and the
National Treasury, have weakened South Africa's economy,
finances and institutions.
Events during the review period may offer some clarity regarding the future
path of South Africa's political economy, and therefore regarding
the prospects for investment and for the structural reform effort and
ultimately for growth. Political developments may provide insights
into the direction, content and credibility of the future policy
framework. The review period will therefore also allow Moody's
to take stock of the implications of political developments for key structural
reforms that could boost investor confidence in the near term and support
higher growth trends over the medium- and longer-term.
RATIONALE FOR THE Baa3 RATING
South Africa's credit profile retains a number of features that
support a Baa3 rating. Its economy is large and well-diversified,
though characterized by low growth and high unemployment. Its domestic
financial markets are deep and its banking sector is well-capitalized.
It possesses a well-developed macroeconomic framework. While
debt levels have risen, at current levels they remain consistent
with Baa3 peers. And though reliance on external capital creates
exposure to shocks, the flexible exchange rate and low foreign currency
debt serve as buffers. Despite recent encroachments, its
core institutions remain independent and strong, with a well-functioning
civil society. Adherence to the constitution and the rule of law
continue to be the key pillars of South Africa's institutional strength.
WHAT COULD CHANGE THE RATING -- DOWN
Moody's would downgrade the rating if the review were to conclude that
South Africa's economic, institutional and fiscal strength
will continue to weaken. A downgrade would likely result were the
rating agency to conclude that measures to address funding gaps over the
next two years lacked credibility or that the lack of progress with structural
reforms effort would result in an environment not conducive to investment
and growth. Lack of structural reforms would also send a negative
signal regarding the strength of South Africa's institutions,
in particular about government effectiveness in enacting sound policies.
Relatedly, any developments which cast further doubt over the independence
and credibility of core institutions including the National Treasury and
the Reserve Bank would be strongly credit negative.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody's would confirm the rating at Baa3 if the review were to conclude
that the policy response is likely to bring the economic, institutional
and fiscal trends on a path so that these factors remain consistent with
Baa3 peers; and that developments in the political economy offer
the prospect of a more stable, growth-friendly institutional
backdrop.
GDP per capita (PPP basis, US$): 13,291 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.3% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.1%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3.3%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.3% (2016 Actual)
(also known as External Balance)
External debt/GDP: 48.4% (2016 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 21 November 2017, a rating committee was called to discuss the
rating of Government of South Africa. The main points raised during
the discussion were: The issuer's institutional strength/framework,
has decreased. The issuer's fiscal or financial strength,
including its debt profile, has decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
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 credit 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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Zuzana Brixiova
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
