London, 03 April 2017 -- Moody's Investors Service has today placed the Baa2 long-term issuer
and senior unsecured bond ratings of the government of South Africa on
review for downgrade.
The decision to initiate a review for downgrade was prompted by the abrupt
change in leadership of key government institutions. That action
has raised questions regarding:
- progress on reforms previously identified as essential to sustain
South Africa's fiscal and economic strength, and the effectiveness
of South Africa's policymaking institutions; and
- the more immediate implications for growth and public debt given
the potentially negative impact on fragile domestic and external investor
confidence.
The review will allow Moody's to assess these risks and if the changes
in leadership signal a weakening in the country's institutional,
economic and fiscal strength.
South Africa's (P)Baa2 Senior Unsecured Shelf and MTN program ratings
were also placed under review for downgrade, as was the (P)P-2
Senior Unsecured Short-Term rating.
In a related rating action, Moody's has also placed on review for
downgrade the Baa2 senior unsecured rating of the ZAR Sovereign Capital
Fund Propriety Limited, which is fully and unconditionally guaranteed
by the Republic of South Africa.
South Africa's long-term local-currency bond and bank
deposit country ceiling remain unchanged at A1. The long-term
foreign-currency bond and bank deposits country ceilings remain
unchanged at A2 and Baa2, respectively.
Its short-term foreign-currency bonds and bank deposits
country ceilings also remain unchanged at Prime-1 (P-1)
and Prime-2 (P-2), respectively.
RATINGS RATIONALE
On 30 March, the President of South Africa announced wide-ranging
changes to the country's government, changing top leadership
in 10 ministries, including in key portfolios such as finance and
energy.
Changes within a government do not generally signal material changes in
a country's credit profile. Here, however, the
timing and scope of the reshuffle raises questions over the signal they
send regarding the prospects for ongoing reforms, the underlying
strength of South Africa's institutional framework, and the
fragile recovery in the country's economic and fiscal position.
POLICYMAKING, ECONOMIC AND FISCAL REFORM
The review will assess the likelihood of changes in key areas of financial
and macro-economic policymaking as well as in strategic structural
areas such as energy policy. In recent years, a number of
important areas for reform have been identified by the government,
aimed at boosting potential growth and consolidating public finances,
including those of state-owned enterprises (SOEs), in order
to enhance the sustainability of government finances, and contain
exposure to contingent liabilities.
Some key reforms have indeed been implemented, with commensurate
improvements in areas such as energy provision and industrial relations.
However, several aspects of the government's reform programme
remain outstanding, particularly in completing the legislative and
administrative framework governing the mining sector, product market
competition, in the labour market, in relation to the development
of the private sector, and in encouraging a more even distribution
of wealth.
During the review, Moody's will assess any announced or likely changes
in the government's plans and the implications for potential growth and
hence for the reversal of the rising debt burden. Moody's
will also assess any implications for progress on currently stalled structural
reforms in strategic areas such as regulation of the mining sector or
regulations that would increase transparency in the financial transactions
of large businesses; and the prospects for continued progress on
reforms to enhance transparency, accountability and good governance
in the SOE sector, and to remove structures that encourage rent-seeking
over achievement of public policy goals.
The review will also explore the implications of the underlying political
dynamics which led to the changes in ministerial appointments for the
predictability of South Africa's institutional framework,
including for the government's capacity to conduct sound economic policies
which foster economic and fiscal strength. The strength of South
Africa's institutions has been historically an important source
of support to the creditworthiness of the country, nurturing a policy
framework that has generally been effective in containing fiscal and macroeconomic
imbalances. Moody's intends to use the review to determine
whether the ongoing tensions within the ANC weaken the credibility and
effectiveness of South Africa's policymaking, the effectiveness
and independence of the public service and ultimately the strength of
the country's institutions.
IMPLICATIONS FOR GROWTH AND DEBT SUSTAINABIILTY
South Africa's economy appears to be turning a corner. After
years of Moody's, in common with other commentators,
adjusting growth forecasts downwards, a combination of factors resulted
in a growth outturn for 2016 which, while very low (+0.3%),
was consistent with prior forecasts. Moody's expectations
were a recovery in growth to just over 1% in 2017 and close to
2% in 2018. Fiscal consolidation, including stabilizing
the debt-to-GDP ratio, was similarly on track.
That recovery reflects a number of factors. Some include the reforms
mentioned earlier, which have restored stability into electricity
supply and reduced industrial disputes. Others include the gradual
recovery in world growth and trade, the stabilization of commodities
prices and the easing of drought conditions.
But the recovery is fragile, and higher growth in future will be
highly dependent on domestic and external investment, and therefore
on investor confidence. Although South Africa has low foreign currency-denominated
debt, about one third of government's rand-denominated
bonds is held by non-residents, implying higher yields and
rollover risk exposure should investor confidence be undermined.
Moreover, rising business confidence is a precondition for the revival
of private investment, which declined last year and Moody's
projects it to stagnate in 2017.
Moody's review will seek to clarify to what extent these indicators
and broader sentiment within the business community may be impacted by
the reshuffle. The review period will allow Moody's to gain
a better picture of any potential changes to medium term fiscal plans,
the impact on market prices, inflationary pressures and renewed
liquidity challenges of SOEs.
WHAT COULD CHANGE THE RATING - DOWN
Moody's could downgrade South Africa's issuer rating if the rating
agency were to conclude that recent events signaled a deterioration in
the effectiveness of government or in the credibility of its policy-making;
and relatedly in the country's economic or fiscal strength.
Such a conclusion would be supported by, for example, i) a
shift towards policies that Moody's concluded were likely to undermine
economic and/or fiscal strength; for example a likely deviation from
measures outlined in the 2017 budget and the related medium term framework
or the lack of progress on SOE reform; or ii) further domestic or
external shocks to growth.
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 the impact of recent events on government fiscal and economic policies
and on the economy's forecast and potential growth was likely to
be minimal.
In Moody's view, the announced changes required the publication
of this credit rating action on a date that deviates from the previously
scheduled release date in the EU sovereign release calendar, published
on www.moodys.com.
GDP per capita (PPP basis, US$): 13,209 (2015
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): 7.1%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3.4%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.8% (2016 Actual)
(also known as External Balance)
External debt/GDP: 51.8% (2016 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 02 April 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 not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
materially decreased. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed.
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.
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
SUBSCRIBERS: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
