Moody’s Investors Service’s outlook for South Africa’s Baa2 local and foreign currency credit rating has changed from stable to negative, the service announced on Wednesday.
According to Moody’s, persistently weak growth, the growing risk of fiscal slippages and political pressures were reasons for the change.
This is noteworthy after the merry-go-round at the finance ministry in the last week. President Jacob Zuma sent the country and the markets into shock last Wednesday evening by suddenly replacing respected finance minister Nhlanhla Nene with a relative unknown, who was himself replaced a few days later by former finance minister Pravin Gordhan.
The markets and rand went into freefall with the first announcement but started to steady after Gordhan was reappointed. The consensus in business by Tuesday was that a lot of damage had been done and it would take some time to recover.
Moody’s did, however, affirm the country’s Baa2 rating, “because of the country’s track record of sound macroeconomic policies”.
A statement from Moody’s added: “Although growth has continually disappointed in recent years due to a combination of domestic and external circumstances, spending restraint and the buoyancy of fiscal revenues to date has led to only marginal deviations for budget deficits and debt.”
The Moody’s rating is still a notch above Fitch’s newly assigned BBB- foreign currency credit rating with a stable outlook and one notch above Standard & Poor’s BBB- foreign currency credit rating with a negative outlook. Both Fitch and S&P revised South Africa’s credit ratings downwards on December 4. Both of these agencies distinguish between foreign currency and local currency creditworthiness and therefore have separate local currency ratings: BBB+ for S&P and BBB for Fitch.
This difference between the foreign and local currency ratings is an important but little recognised distinction, according to Peter Worthington, principal and senior economist at Barclays Africa. The market tends to focus on the foreign currency credit ratings, especially regarding a potential downgrade to sub-investment grade status, so-called junk, for South Africa.
“However,” Worthington said, “the ratings that matter to funds that are mandated to hold only investment grade assets are the ratings of the particular bonds in question, which may be predominantly local currency. Thus, a move to junk status on one foreign currency rating need not spell a large mandatory outflow.”
– African News Agency (ANA)