London, 09 June 2017 -- Moody's Investors Service today downgraded the long-term issuer
and senior unsecured ratings of the Government of South Africa to Baa3
from Baa2 as well as the senior unsecured Shelf and MTN program ratings
to (P)Baa3 from (P)Baa2, and assigned a negative outlook.
The government's senior unsecured short-term program rating was
also downgraded to (P)P-3 from (P)P-2. The rating
actions conclude the review for downgrade that commenced on 3 April 2017.
The key drivers for the downgrade are:
1) the weakening of South Africa's institutional framework;
2) reduced growth prospects reflecting policy uncertainty and slower progress
with structural reforms; and
3) the continued erosion of fiscal strength due to rising public debt
and contingent liabilities
The Baa3 rating recognizes a number of important strengths that continue
to support South Africa's creditworthiness. However,
the negative outlook reflects the continued downside risks for growth
and fiscal consolidation associated with the political outlook.
Over the medium-term, economic and fiscal strength will remain
sensitive to investor confidence and hence uncertainty surrounding political
developments, including prospects for structural reforms intended
to raise potential growth and flexibility in fiscal expenditures.
In a related decision, Moody's also downgraded to Baa3 from
Baa2 the backed senior unsecured debt issued by 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.
South Africa's long-term local-currency bond and deposit
ceilings were lowered to A2 from A1, and the long-term and
short-term foreign-currency bond ceilings lowered to A3/P-2
from A2/P-1, respectively. The long-term foreign-currency
bank deposits ceilings was lowered to Baa3 from Baa2, while the
short-term foreign-currency bank deposits ceiling was lowered
to P-3 from P-2.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADING TO Baa3
The downgrade reflects Moody's view that recent political developments
suggest a weakening of the country's institutional strength which
casts doubt over the strength and sustainability of the recovery in growth
and the stabilisation of the debt-to-GDP ratio over the
near-term.
First driver -- evidence of systemic weakening of the institutional
framework
The first driver for the downgrade is Moody's view that South Africa's
institutional strength, the second factor in our rating methodology,
has eroded.
The independence and strength of key institutions such as the judiciary,
the Reserve Bank and the National Treasury are a key support in Moody's
assessment of South Africa's credit profile, through ensuring
the continuity of a predictable, credit-supportive policy
environment. Moody's has taken comfort from the manifest
commitment of the country's policy institutions to achieving a broad
program of structural reforms through cooperation between government,
labour, and business, while at the same time maintaining rigorous
adherence to fiscal spending ceilings and embarking on reforms of state-owned
enterprises.
However, 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.
Second driver -- reduced growth prospects
As a consequence, 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.
Uncertainty over near- and medium-term policy priorities
has damaged investor confidence, reducing investment in South Africa's
economy which fell by 3.9% in 2016 and is projected to remain
subdued in 2017. Investment levels are likely to remain weak until
a more stable policy environment emerges.
Medium-term growth will additionally be constrained by mixed progress
with structural reforms, including delays in the implementation
of reforms in the mining sector, in the governance of state-owned
enterprises, and in the elimination of barriers to competition in
key network sectors. With the economy already recording two consecutive
quarters of contraction prior to the cabinet reshuffle, Moody's
forecasts growth below 1% in 2017 and 1.5% in 2018,
with stagnating investment reducing medium-term (and potential)
growth as well.
Third driver -- continued erosion of fiscal strength
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.
In Moody's view, lower than expected growth will further delay
the stabilization of South Africa's debt-to-GDP ratio.
Instead of stabilizing in 2018/19 Moody's now expects the debt burden
will reach about 55% of GDP that year and continue to rise gradually
afterwards. While the National Treasury has reiterated its commitment
to expenditure ceilings, pressures to raise public wages will again
rise in the next fiscal year as the end of the current three-year
agreement will open room for new negotiations. Underperformance
on revenue collection is another risk.
Furthermore, contingent liabilities linked to state-owned
enterprises continue to pose a tail risk to the country's fiscal
strength. Operational inefficiencies, weak corporate governance,
and poor procurement practices persist in SOEs, with government
guarantees extended to SOEs rising. This has also increased the
likelihood of contingent liabilities crystalizing on the government's
balance sheet. Pressures to further extend guarantees and utilize
procurement practices to advance political objectives are sources of additional
potential risk.
RATIONALE FOR THE Baa3 RATING
South Africa maintains a number of credit strengths that 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. Moreover, deterioration in
the factors driving the downgrade has been gradual. Importantly,
adherence to the Constitutionƒ accountability and the rule of law
continue to be the key pillars of strength of South Africa's institutions,
with South Africa's institutions on balance still stronger than
those of emerging market peers.
RATIONALE FOR ASSIGNING A NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that the risks to growth
and fiscal strength arising from the political outlook are tilted to the
downside. It is unlikely that a political consensus will emerge
which supports investment in the economy and reinvigorates the reform
effort sufficiently quickly to reverse the expected negative impact on
growth and on the government's balance sheet. The opposite
scenario, of heightened political dysfunction, continued gradual
institutional weakening and diminished clarity over policy objectives,
has a higher likelihood.
WHAT COULD CHANGE THE RATING -- DOWN
The future trajectory of the rating will depend on the government's success
in safeguarding South Africa's institutional, economic and
fiscal strength. Indications that the strength and independence
of the country's institutions have diminished to a greater extent
than in Moody's baseline scenario, or that the emerging policy
framework has become even less predictable or has shifted in a way likely
to undermine economic or fiscal strength, could lead to a further
downgrade. Further delays in growth enhancing reforms would be
suggestive of such a shift. Downward pressure could also develop
if liquidity pressures begin to reemerge at state-owned enterprises
that would elicit pronounced government intervention, be it through
the activation of guarantees or other measures.
WHAT COULD LEAD TO STABILIZATION OF THE OUTLOOK AT THE CURRENT RATING
LEVEL
Conversely, Moody's could change the rating outlook from negative
to stable if the government were to deliver on commitments that indicated
the continued independence and strong policy-making capabilities
of South Africa's policy institutions, and which enhanced
medium-term growth and achieved the planned stabilization in the
government's debt burden. A decline in the value of guarantees
to state-owned enterprises would also be credit positive.
Prompted by the factors described above, the publication of this
credit rating action occurs on a date that deviates from the previously
scheduled release date in the sovereign release calendar, published
on www.moodys.com.
GDP per capita (PPP basis, US$): 12,679 (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): 6.8%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3.7%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.2% (2016 Actual)
(also known as External Balance)
External debt/GDP: 52.3% (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 06 June 2017, 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 institutional strength/framework, have materially decreased.
The issuer's governance and/or management, have materially 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.
Moody's Investors Service has today also published an updated to the National
Scale Ratings (NSR) map for South Africa in conjunction with the downgrade
of the government's long-term issuer rating. Moody's
NSRs are ordinal rankings of creditworthiness relative to other credits
within a given country, which offer enhanced credit differentiation
among local credits. NSRs are generated from Global Scale Ratings
(GSRs) through correspondences, or maps, specific to each
country. However, unlike GSRs, Moody's NSRs are not
intended to rank credits across multiple countries. Instead,
they provide a measure of relative creditworthiness within a single country.
The full maps can be found in "National Scale Rating Maps by Country",
published on 9 June 2017.
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
