Paris, March 27, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the Government of South Africa's long-term foreign-currency
and local-currency issuer ratings to Ba1 from Baa3. The
outlook remains negative.
The key driver behind the rating downgrade to Ba1 is the continuing deterioration
in fiscal strength and structurally very weak growth, which Moody's
does not expect current policy settings to address effectively.
Both outcomes speak to weaker economic and fiscal policy effectiveness
than Moody's previously assumed.
The negative outlook reflects the risk that economic growth will prove
even weaker and the debt burden will rise even faster and further than
currently expected, weakening debt affordability and potentially,
access to funding.
Moody's also downgraded South Africa's long-term foreign-currency
and local-currency senior unsecured debt ratings to Ba1 from Baa3,
its foreign-currency senior unsecured MTN and senior unsecured
Shelf ratings to (P)Ba1 from (P)Baa3, as well as its foreign-currency
other short-term rating to (P)NP from (P)P-3.
In a related action, Moody's downgraded ZAR Sovereign Capital
Fund Propriety Limited's foreign currency, backed senior unsecured
debt rating to Ba1 from Baa3 and maintained its negative outlook.
ZAR Sovereign Capital Fund Propriety Limited is a special purpose vehicle
whose debt issuance is ultimately the obligation of the South African
government.
All South Africa's long-term country risk ceilings were revised
down by one notch. Its long-term local-currency bond
and bank deposits ceilings were revised down to A3 from A2, and
the long-term foreign-currency bond ceilings to Baa1 from
A3. The short-term bond foreign-currency ceiling
remained unchanged at Prime-2. Moody's also lowered
the long-term foreign-currency bank deposits ceilings to
Ba1 from Baa3 and the short-term foreign-currency bank deposits
ceiling to Not Prime(NP) from Prime-3.
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO Ba1
STRUCTURALLY VERY WEAK GROWTH AND CONSTRAINED CAPACITY TO STIMULATE THE
ECONOMY
Unreliable electricity supply, persistent weak business confidence
and investment as well as long-standing structural labour market
rigidities continue to constrain South Africa's economic growth.
As a result, South Africa is entering a period of much lower global
growth in an economically vulnerable position. The government's
own capacity to limit the economic deterioration, in the current
shock and more durably is constrained. Fiscal space is very limited
and looser monetary policy will not address underlying structural problems.
The unprecedented deterioration in the global economic outlook caused
by the rapid spread of the coronavirus outbreak will exacerbate the South
Africa's economic and fiscal challenges and will complicate the
emergence of effective policy responses.
Progress on structural economic reforms has been very limited.
Some initiatives to improve competition and encourage job creation have
progressed, but none that constitute a step-change for the
economy. Structural issues such as labour market rigidities and
uncertainty over property rights generated by the planned land reform
remain unaddressed. Moreover, a strategy to stabilize electricity
production has been slow to emerge and has yet to prove its effectiveness.
Moody's assumes that while power supply will become more reliable,
the restoration of full capacity will take some years to complete.
As a result, after the immediate sharp downturn, growth will
remain very low in the following years.
INEXORABLE RISE IN GOVERNMENT DEBT OVER THE MEDIUM TERM
South Africa's debt burden will rise over the next five years under
any plausible economic and fiscal scenario.
Debt-to-GDP increased by 10 percentage points (ppts) over
2014-18 and will rise by a further 22 ppts over 2019-23
under Moody's baseline projections. Over that timeframe,
Moody's expects primary deficits to persist. The fiscal deficit
will widen in fiscal 2020 to around 8.5% of GDP, as
revenue declines this year, only narrowing very gradually thereafter.
Fiscal strains from interest payments and support to state-owned
enterprises will continue.
In this context, and consistent with the recently announced budget,
any fiscal consolidation will rest primarily on containing the large and
growing public sector wage bill. The government aims to achieve
ZAR160 billion (3% of GDP) in savings over the next three fiscal
years by keeping wage growth below inflation. That would mark a
material departure from current agreements and past outcomes, and
as such is likely to prove challenging to implement. Moody's
expects expenditure on wages to exceed budget at least in 2020.
Interest rates are likely to rise above the levels assumed in the budget
and nominal growth will be weaker. Moody's estimates that
the debt burden will reach 91% of GDP by fiscal 2023, inclusive
of the guarantees to state-owned enterprises from 69% at
end of fiscal 2019. Even if the government's plans to restrain
wage growth were fully implemented, debt-to-GDP would
still continue to rise significantly. Similarly, even under
a scenario of more effective improvement in tax compliance and falling
interest rates from fiscal 2021, government debt would still rise
to around 87% by 2023.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects downside risks around economic growth and
fiscal metrics, that could lead to an even more rapid and sizeable
increase in the debt burden, further lowering debt affordability
and potentially weakening South Africa's access to funding.
Downside risks to growth are both immediate and longer term, relating
to heightened uncertainty about the economic impact of the coronavirus
pandemic and to the possibility that negative economic sentiment becomes
further entrenched as policymakers and stakeholders continue to struggle
to reach consensus on the structural reforms that would sustainably stimulate
growth and employment. With unemployment at already very high levels
(29%), even weaker growth would have significantly negative
social implications.
Should these downside risks materialise, South Africa's government
debt would stabilise later and at a higher level than currently expected
by Moody's. A steeper increase in debt would weaken debt
affordability, potentially challenging the government's currently
strong access to funding at manageable costs, particularly during
periods of acute risk aversion by global investors such as at present.
Although South Africa's exposure to global financing conditions
is mitigated by its reliance on local currency debt, its weak economic
and fiscal fundamentals could exacerbate adverse capital flows.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental risk influences Moody's assessment of South Africa's
economic resilience. Due to its geographical location, South
Africa is subject to frequent climate change-related shocks such
as droughts which undermine the agricultural sector's performance
and weigh on growth. Set against that, the country's
economic diversification and sophisticated agricultural techniques mitigate
the impact of environmental considerations on South Africa's credit
profile.
Social considerations are material for South Africa's credit profile and
their implications for the economy and public finances are a driver of
the rating downgrade. Deep socio-economic inequalities complicate
the implementation of reforms that would otherwise unlock the economy's
significant potential. They also contribute to tensions and resistance
from key stakeholders that ultimately fuel political risk.
Governance considerations are material to South Africa's credit
profile. South Africa's ranking under the Worldwide Governance
Indicators is stronger than Ba1-rated sovereigns, and the
strength of key institutions, in particular the South African Reserve
Bank and the Treasury, support the rating. However,
the broader erosion in institutional strength induced by the wide-spread
corruption of the Zuma administration is an important factor behind the
erosion in South Africa's credit profile in recent years.
Moreover, the legacy that era has bequeathed of poor governance
of state-owned enterprisess remains a key drain on fiscal resources.
WHAT COULD CHANGE THE RATING UP
Given the negative outlook a rating upgrade is unlikely in the near future.
Moody's would likely change the rating outlook to stable if the
government's medium-term fiscal consolidation were to proceed
broadly in line with the rating agency's central expectations,
with prospects of a slow but durable pick-up in growth and financing
risks remaining low. In this scenario, Moody's would
likely see a gradual reduction in South Africa's primary deficit
in the next few years, with increasing assurance that government
debt will stabilize comfortably below 90% of GDP.
WHAT COULD CHANGE THE RATING DOWN
South Africa's ratings would likely be downgraded if Moody's
were to conclude that any combination of very weak growth, failure
to reduce the primary deficit, and rising financing costs was likely
to cause the debt burden to rise to even higher levels than currently
projected with even greater uncertainty regarding its eventual stabilisation,
in turn threatening South Africa's access to funding at manageable
costs. Such an outcome would speak to weaker institutional policymaking
capacity and, over time, a diminution of economic and fiscal
strength consistent with lower rating levels.
Important indicators in this regard include the government's ability
over the next year or so to contain the impact of global recession on
the South African economy and to promote recovery thereafter; to
agree and begin to implement the structural reforms that would strengthen
the economy. The implementation of the framework for a reliable
supply of power to the economy and fiscal reforms to contain expenditure
and enhance revenues are important milestones.
NATIONAL SCALE RATINGS
Moody's will shortly publish an update to its National Scale Rating (NSR)
map for South Africa to reflect 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 accessed through the "Index
of Current and Superseded Compendia of National Scale Rating Maps by Country".
GDP per capita (PPP basis, US$): 13,630 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.8% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4.4%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -4%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.5% (2018 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa2
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 24 March 2020, 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 institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has materially decreased. The issuer's
susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. 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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. 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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
