New York, May 06, 2016 -- Moody's Investors Service today confirmed South Africa's Baa2
long-term government bond and issuer ratings as well as its (P)Baa2/(P)P-2
shelf and MTN program ratings, and assigned a negative outlook.
The rating actions conclude a review for downgrade that commenced on March
8, 2016.
The confirmation of South Africa's ratings reflects Moody's
view that the country is likely approaching a turning point after several
years of falling growth; that the 2016/17 budget and medium term
fiscal plan will likely stabilize and eventually reduce the general government
debt metrics; and that recent political developments, while
disruptive, testify to the underlying strength of South Africa's
institutions.
The negative outlook speaks to the implementation risks associated with
the structural and legislative reforms that the government, business
and labor recently agreed in order to restore confidence and encourage
private sector investment, upon which Moody's expectations
for growth and fiscal consolidation in coming years -- and hence
the Baa2 rating -- rely.
In a related move, Moody's also confirmed the Baa2 rating
of ZAR Sovereign Capital Fund Propriety Limited, a special purpose
vehicle whose debt issuance is ultimately the obligation of the South
African government, and assigned a negative outlook.
Moody's made no changes to South Africa's local or foreign
currency country ceilings, which remain at A1 for local currency
debt and deposits, A2/P-1 for foreign currency debt and Baa2/P-2
for foreign currency bank deposits.
RATINGS RATIONALE
RATIONALE FOR CONFIRMING THE EXISTING RATINGS
FIRST DRIVER -- LIKELIHOOD OF GROWTH RECOVERY BEYOND 2016
The first driver for the confirmation is Moody's expectation that
South Africa's economic growth will gradually strengthen after reaching
a trough this year, as the various supply-side shocks that
have suppressed economic activity since 2014 recede. Specifically,
the electricity supply is now more reliable, the drought is ending
and the number of work days lost to strikes has shrunk significantly (a
trend that planned rule changes are likely to embed further). In
addition, the inflation outlook is more subdued, which would
suggest fewer interest rate rises ahead than we expected when the South
African Reserve Bank saw inflation heading towards 8% by year end.
Less severe tightening of monetary policy would alleviate extra pressure
on South Africa's relatively highly-indebted household sector
and support growth.
Alongside the more competitive exchange rate, these improving trends
are likely to strengthen growth in South Africa from the second half of
this year and thereafter. While we expect the economy to expand
by only 0.5% in 2016, we expect growth to rise to
1.5% in 2017. Moreover, ongoing structural
reforms and diminished infrastructure bottlenecks offer upside potential
for growth over the medium term. The recent rapprochement between
the government, business and labor holds promise from the standpoint
of identifying areas of mutual concern. A number of benchmark actions
related to matters such as the rationalization of state-owned enterprises
(SOEs) and the enactment of labor market reforms have been identified
in the process. To the extent that implementation of such measures
helps boost business confidence, investment and job creation,
they would improve prospects for gradually reducing wide economic disparities
and high levels of poverty, deprivation and unemployment.
SECOND DRIVER -- STABILIZATION OF GOVERNMENT DEBT RATIOS LIKELY TO
OCCUR IN 2016/17
The adoption of more aggressive consolidating measures in the recent budget
increases the likelihood that the general government gross debt to GDP
ratio will stabilize in the current fiscal year at around the current
level of 51%. For the first time since the global financial
crisis, the government has pledged to achieve a primary surplus
on the consolidated government account in 2016/17, as well as in
the main budget the following year, with surpluses scheduled to
grow each year thereafter.
In Moody's view, the government's recent track record
of achieving fiscal targets lends weight to their future plans:
the principal driver of the rising debt ratio in recent years has been
lower-than-expected GDP growth since targets for revenue,
spending and deficits were largely met even when growth fell short.
The authorities have made conservative forecasts for revenue over the
coming three years, including in terms of expected receipts generated
from future tax increases, providing reassurance that such ambitious
deficit targets can be achieved.
Moody's says that the budget displays a high degree of flexibility.
The authorities have reestablished a small unallocated spending buffer
in the new budget framework and also have been able to shift existing
allocations to other emerging needs such as drought relief and higher
education spending. Such flexibility will be supportive in allowing
the government to address unanticipated developments without breaching
the spending ceilings. The authorities have also stated that expensive
new projects such as the construction of massive nuclear power facilities
and national health insurance will be developed only at the pace and scale
that the budget allows.
THIRD DRIVER -- RECENT POLITICAL DEVELOPMENTS TESTIFY TO THE STRENGTH
OF SOUTH AFRICA'S INSTITUTIONS
Moody's continues to assess South Africa's institutional strength
as high, notwithstanding recent corruption scandals. South
Africa's monetary and fiscal institutions have proven to be sound
over time. The reappointment of a respected former finance minister
to the post following the intervention of the ANC leadership late last
year, along with the more ambitious budget that the minister tabled
in February, demonstrated determination to bring the public finances
under control. In Moody's opinion, the Constitutional
Court judgment against the president over the misuse of public funds and
the parliament for rejecting the ruling of the public prosecutor and,
more recently, the High Court ruling to reinstate corruption-related
charges against the president that were dropped prior to his taking office
in 2009 attest to the strength and independence of South Africa's
constitution and judicial system and renewed attentiveness to bringing
corruption out into the open and maintaining the rule of law. The
local government elections, scheduled for August 3 this year,
will be a litmus test as to whether and by how much these developments
are eroding the ANC's electoral support and the consequences for
the robustness and clarity of economic and fiscal policy.
RATIONALE FOR ASSIGNING A NEGATIVE OUTLOOK
The negative outlook recognizes the downside risks associated with the
growth, fiscal and political outlook, and the possibility
that renewed volatility in global financial markets could increase external
imbalances and disrupt growth. While the government has taken important
first steps towards fiscal consolidation, deeper structural reforms
to restore business confidence and raise the economy's growth potential
are in their very early stages. Even over the near term,
growth (and therefore the strength of the government's balance sheet)
will remain sensitive to consumer and investor confidence regarding the
prospects for reform and efforts to distance the policymaking process
from corruption scandals.
WHAT COULD CHANGE THE RATING - DOWN
The future trajectory of the rating will be highly dependent on the government's
success in enhancing medium term growth and in arresting the deterioration
in the government's balance sheet.
Moody's would likely downgrade South Africa's rating if economic
growth were to fail to revive, if we were to conclude that the government's
determination to stabilize and then improve its debt metrics was likely
to falter, or if investor confidence were to decline by such an
extent that external financing was insufficient to fund the current account
deficit on an extended basis. The failure of social partners to
implement policies or measures that would secure a healthier investor
climate and attract increased private investment would also be negative.
Finally, we could downgrade the rating should the government unduly
delay enacting reforms that would address fundamental economic rigidities
and enhance competitiveness.
WHAT COULD LEAD TO STABILIZATION OF THE OUTLOOK AT THE CURRENT RATING
LEVEL
Moody's could change the rating outlook from negative to stable
if the government were to deliver on commitments that support growth and
achieve the pledged stabilization and eventual reduction in general government
debt. Measures to win back business confidence (such as rationalizing
the state-owned enterprise sector, clarifying Black Economic
Empowerment (BEE) regulation and expanding the Independent Power Producer
(IPP) framework into new areas of infrastructure), would also be
credit positive.
GDP per capita (PPP basis, US$): 13,165 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.3% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.2%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -3.3%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.4% (2015 Actual)
(also known as External Balance)
External debt/GDP: 39.7% (2015 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 03 May 2016, 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 not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
have not materially changed. Other views raised included:
The issuer's institutional strength/ framework, have not materially
changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Ratings 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.
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
Yves Lemay
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 confirms South Africa's sovereign rating at Baa2 and assigns a negative outlook
