New York, March 08, 2016 -- Moody's Investors Service has today placed the Baa2 bond and issuer
ratings of the government of South Africa on review for downgrade.
Also placed on review for downgrade were South Africa's (P)Baa2/(P)P-2
shelf and MTN program ratings.
The decision to place the ratings on review was prompted by the continuing
rise in risks to the country's medium-term economic prospects
and to its fiscal strength, notwithstanding the tighter fiscal stance
undertaken in the 2016/17 budget. The review will allow Moody's
to assess to what extent government policy can stabilize the economy and
restore fiscal strength in the face of heightened domestic and international
market volatility.
In a related rating action, Moody's has also placed on review
for downgrade the Baa2 rating of the ZAR Sovereign Capital Fund Propriety
Limited, which is fully and unconditionally guaranteed by the Republic
of South Africa.
RATINGS RATIONALE
RATIONALE FOR INITIATING THE REVIEW FOR POSSIBLE DOWNGRADE
FIRST DRIVER: TO ASSESS LIKELIHOOD THAT MEDIUM-TERM GROWTH
PROSPECTS WILL STRENGTHEN
The first driver for the review is to allow Moody's to assess to
the likelihood that the decline in South Africa's economic strength
will be reversed over the medium term. Moody's cited South
Africa's weak economic performance as a risk factor when assigning
a negative outlook to the rating in December 2015. We noted then
that the economy was vulnerable to further adverse global, regional,
domestic and financial market dynamics, with concomitant negative
implications for government revenues, the fiscal balance and the
government's debt burden. Last year's growth dropped
to 1.3%, the slowest pace since the 2009 global financial
crisis.
Since then, growth prospects have worsened. Moody's
expects growth to decline still further, to 0.5% in
2016, as a consequence of the intensification of this year's
drought, low commodity prices as well as the volatility in global
and domestic financial markets since December, resulting in a further
steep depreciation of the exchange rate and widening bond yields.
The drought has necessitated imports of key grain crops and pushed up
food prices and overall inflation rates, leading to interest rate
rises which have further undermined growth. This has also led the
government to reallocate spending from other areas to provide drought
relief.
During the review, Moody's will assess the likely effectiveness
of the government's plans, including those contained in the
National Development Plan, to address structural constraints on
a more inclusive growth through improvements in infrastructure.
The rating agency will also use the review period to examine whether recent
reforms, such as the amendment to the Labor Relations Act last year,
are likely to reduce work stoppages from strikes as the end of various
key wage agreements approaches and thereby potentially improve how business
views the labor market environment in South Africa.
SECOND DRIVER -- TO ASSESS THE LIKELIHOOD OF STABILISATION AND RESTORATION
OF FISCAL STRENGTH
The second driver of the review is to allow Moody's to assess whether
government policy is likely to lead to a reversal in the continuing erosion
of the government's balance sheet. Over the last several
years, South Africa has experienced a series of external shocks
and adverse domestic developments (including lower than forecast growth,
but also large public sector wage hikes) that have progressively weakened
the government's balance sheet.
The worsening debt dynamic was another factor Moody's noted when
assigning a negative outlook to the rating in December 2015. As
with growth, the debt position has continued to deteriorate,
even if only slightly. Despite the government's adherence
to expenditure ceilings in recent years, adverse growth and revenue
dynamics have resulted in debt to GDP (excluding guarantees) increasing
to 50% of GDP this fiscal year from a trough of 26.5%
in March 2009. The deterioration in key fiscal and debt metrics
has rendered the country's public finances increasingly vulnerable
to negative shocks.
During the review, Moody's will examine the likelihood of
the recently announced 2016/17 budget and medium term expenditure framework
being implemented as intended, and achieving the stated objective
of consolidating the public finances and reversing the deterioration in
fiscal strength witnessed in recent years. The ratings agency will
explore the implications of expensive schemes, such as nuclear energy
and National Health Insurance, for the government's finances
in an environment of rising interest rates. It will also assess
the implications for policy of the prolonged lull in growth, persistent
spending pressures and political drivers such as the upcoming local elections.
WHAT COULD CHANGE THE RATING - DOWN
Moody's could downgrade the rating if the review were to conclude
that government policy and strategy is unlikely to lead to a reversal
in the debt trajectory. Evidence of further shocks to growth and/or
lower confidence in policymakers' commitment to fiscal restraint
could lead to a downgrade. Further deterioration in the investment
climate would also place downward pressure on the rating if it undermined
medium-term growth prospects and/or the availability of external
financing for the current account deficit. More generally,
indications that the slowdown in growth will be even deeper and more protracted
than currently expected would be negative for the rating.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody's would confirm the rating at Baa2 if the review were to conclude
that policymakers will maintain spending restraint, succeed in the
delivery of planned structural reforms, achieve the fiscal consolidation
envisioned in the 2016/17 Budget Review, and thereby reverse the
deterioration in key credit metrics witnessed in the past few years.
GDP per capita (PPP basis, US$): 13,094 (2014
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: -3.5%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4% (2015 Actual) (also
known as External Balance)
External debt/GDP: 41.1% (2015 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 04 March 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 materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased.
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 places South Africa's Baa2 ratings on review for downgrade
