Paris, November 20, 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 Ba2 from Ba1. It maintained
the negative outlook in place since 1 November 2019.
Moody's also downgraded South Africa's long-term foreign-currency
and local-currency senior unsecured debt ratings to Ba2 from Ba1,
its provisional senior unsecured MTN programme and senior unsecured Shelf
foreign-currency ratings to (P)Ba2 from (P)Ba1 and affirmed the
provisional other short-term foreign-currency rating at
(P)NP.
The key driver behind the rating downgrade to Ba2 is the further expected
weakening in South Africa's fiscal strength over the medium term.
Whereas the rating action earlier in 2020 reflected an erosion in the
country's credit profile which predated the coronavirus crisis,
today's action reflects Moody's assessment of the impact of
the pandemic shock, both directly on the debt burden and indirectly
by intensifying the country's economic challenges and the social
obstacles to reforms. While South Africa is not alone in having
been severely affected by the crisis, its capacity to mitigate the
shock over the medium term is lower than that of many sovereigns given
significant fiscal, economic and social constraints and rising borrowing
costs. In recent years, the government's strategy has
rested on structural reforms to promote medium-term growth as well
as on fiscal consolidation. However, while the strategy remains
in place, implementation risks have risen materially.
The maintenance of the negative outlook reflects the risks that the debt
burden and debt affordability could deteriorate significantly more than
Moody's currently projects. This partly reflects downside
risks to both growth and the fiscal consolidation assumed in the baseline.
It also reflects the potential for further financial demands from state-owned
enterprises (SOEs) or for higher interest rates given possible shocks
to confidence. If these risks were to materialise, the rise
in the government debt burden would become increasingly difficult to slow
down let alone reverse.
South Africa's long-term local-currency bond and bank
deposits ceilings were lowered to Baa1 from A3, as well as the long-term
foreign-currency bond and bank deposits ceilings to respectively
Baa2 and Ba2 from Baa1 and Ba1. The short-term foreign-currency
bond and bank deposits ceilings remain unchanged at respectively P-2 and
NP.
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO Ba2
FISCAL CHALLENGES HAVE INTENSIFIED AND WILL PERSIST FOR LONGER
The coronavirus shock has intensified South Africa's fiscal challenges
and exacerbated the upward trend in its government debt burden,
which predate the coronavirus crisis. Moody's now projects
government debt-to-GDP to rise to 110% by the end
of fiscal year (FY) 2024 - including SOEs guarantees - equivalent
to a 40 percentage point increase from FY2019.
The crisis will leave long-term scars on South Africa's fiscal
position principally through two channels: a severe loss in revenue
of about 5% of GDP, which the government cannot fully and
quickly compensate through spending cuts nor recover; and rising
borrowing costs. The government will register a wider deficit for
FY2020 than Moody's expected earlier in March when it downgraded
South Africa's ratings to Ba1 from Baa3, and wider deficits
will persist into the medium term, resulting in a markedly steeper
and more prolonged increase in the debt burden than expected in March.
In FY2020, Moody's forecasts the fiscal deficit for South
Africa at about 15% of GDP, in line with the government's
own budget plan last laid out in its October Medium Term Budget Policy
Statement. This forecast assumes that the government will be able
to adhere to its budgeted spending, especially as regards the wage
bill. Its ability to do so is questionable. For example,
the government aims to limit the increase in the wage bill to 2%
this year, which is below inflation and the rate set under the three-year
agreement on public sector wages running for fiscal years 2018-2020,
a decision that unions have contested in court.
From FY2022, interest costs will become the main contributor to
debt-to-GDP increases, reducing fiscal flexibility
further. South Africa's government debt affordability,
measured as the portion of revenue needed to cover interest payments,
will deteriorate to 25% in the medium term.
AS HAVE ECONOMIC AND SOCIAL CONSTRAINTS TO THE GOVERNMENT'S GROWTH
STRATEGY
South Africa is not alone in having been severely affected by the crisis.
However, its capacity to mitigate the shock over the medium term
is lower than that of many sovereigns given significant fiscal,
economic and social constraints which exacerbate the pressures from rising
borrowing costs. In recent years, promotion of potential
growth has been a key plank in the government's strategy to address
rising debt. However, while the strategy remains in place,
implementation risks have risen materially.
South Africa's economic growth will likely remain structurally low
at around 1% in real terms over the medium term, exacerbating
the country's fiscal challenges. This in itself is not new;
low potential growth pre-dates the coronavirus shock. However,
Moody's expects the crisis to intensify South Africa's long-standing
economic and social constraints, making reforms even more challenging
to implement and posing further risks to medium-term growth.
While the government has advanced several reforms, including for
instance to fight corruption, the labour market continues to be
plagued by rigidities. The resulting high unemployment rates will
likely worsen as a result of the coronavirus shock. In turn,
the country's income inequalities, already among the highest
globally prior to the crisis, are likely to intensify, which
in turn will hinder reform implementation and weigh on growth.
The severe economic and social shock is likely to exacerbate the preexisting
frictions between government, corporates and trade unions,
further impeding reform implementation.
NEGATIVE OUTLOOK
The maintenance of the negative outlook reflects the risks that the debt
burden and debt affordability could deteriorate significantly more than
Moody's currently projects. This partly reflects downside
risks to both growth and the fiscal consolidation assumed in the baseline.
It also reflects the potential for further financial demands from state-owned
enterprises (SOEs) or for higher interest rates given possible shocks
to confidence. Eskom Holdings SOC Limited (B3 negative) remains
a particular source of further contingent liability risk for the government;
a solution to its financial viability which addresses its high debt level,
65% of which is government-guaranteed, remains incomplete,
but could itself also lead to a further deterioration in government finances.
If these risks were to materialise, the rise in the government debt
burden would become increasingly difficult to slow down let alone reverse.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations exert material influence on South Africa's
credit profile, mainly reflecting physical climate risk and water
shortages. Due to its geographical location, South Africa
is subject to frequent climate-related shocks such as droughts
which undermine the agricultural sector's performance and have weighed
on growth in recent years. That said, the country's
economic diversification and sophisticated agricultural techniques mitigate
the impact of environmental considerations on South Africa's credit
profile.
Social considerations have a high impact on South Africa's credit profile
and their implications for the economy and public finances are a driver
of today's rating action. Deep socio-economic inequalities
complicate the implementation of reforms which would otherwise unlock
the economy's potential and contribute to tensions that fuel political
risk.
Governance considerations are moderately supportive of South Africa's
credit profile. South Africa's ranking under the Worldwide
Governance Indicators is stronger than Ba2-rated sovereigns,
and the strength of key institutions, in particular the South African
Reserve Bank and the Treasury, continue to support the rating.
However, set against those qualities, the broader erosion
in institutional strength induced by the corruption of the Zuma administration,
and in particular in fiscal policy effectiveness, is an important
factor behind the erosion in South Africa's credit profile in recent
years.
GDP per capita (PPP basis, US$): 12,962 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 4% (2019
Actual)
Gen. Gov. Financial Balance/GDP: -6.4%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3% (2019 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Economic resiliency: baa3
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 17 November 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 not materially changed.
The issuer's institutions and governance strength, have materially
decreased. 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade is unlikely in the near future given the negative outlook.
Moody's would likely change the rating outlook to stable if it were
to conclude that the government's efforts to consolidate its fiscal
position were likely to slow and eventually arrest the rise in the debt
burden and contribute to reducing the cost of debt. Any such outcome
would likely rest on a slow but durable pick-up in growth,
at least partly as a result of meaningful and effective labour market
or power sector reforms, and a steadily-narrowing fiscal
deficit. On the fiscal side, an agreement with the unions
which substantially moderates future increases in the wage bill would
also be supportive.
Moody's would likely downgrade South Africa's ratings if it concluded
that its debt burden, and the related pressure on debt affordability,
were likely to rise materially faster and for longer than currently assumed.
That conclusion could reflect further difficulties in implementing growth-enhancing
reforms, ongoing shocks to primary expenditure or revenues or sustained
rises in the level or volatility of interest rates. Any indication
of diminished access to funding at interest rates that would further endanger
the government debt sustainability would put significant downward pressure
on the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
