Downgrades - the Good, Bad and Ugly


Moody's decided to downgrade South Africa's credit rating.


On 9 June 2017, Moody's Investors Service decided to downgrade South Africa's sovereign credit rating one notch from Baa2 to Baa3. Furthermore, the rating was assigned a negative outlook. SA’s rating is now on the lowest level of investment grade and clearly at risk of slipping into “junk status”. The long-term domestic credit rating was also downgraded one notch to Baa3 and assigned a negative outlook.

The Good:

  • Deep domestic financial markets
  • A well-capitalised banking sector
  • A well-developed macroeconomic framework
  • Low foreign currency debt.
  • Adherence to the Constitution. The rule of law continues to be the key pillars of strength. South Africa's institutions on balance are still stronger than those of emerging market peers.

The Bad:

  • The weakening of South Africa's institutional framework. For example, the abrupt March 2017 Cabinet reshuffle illustrates an erosion of institutional strength.
  • Reduced growth prospects reflect policy uncertainty and slower progresses with structural reforms. In particular, uncertainty over policy priorities has damaged investor confidence.
  • The continued erosion of fiscal strength as a result of rising public debt and contingent liabilities has caused lower than expected growth and will further delay the stabilization of South Africa's debt-to-GDP ratio.

The Ugly:

Overall, the tone of Moody’s credit assessment of South Africa’s has, understandably, changed significantly over the past year. The rating agency is clearly concerned that recent political developments will lead to a continued lack of investment confidence in the country, which will result in sustained low growth; leading to a further deterioration of government’s fiscal position. In other words, unless government is able to meaningfully encourage private sector investment, higher economic growth and improvement in government finances will not occur.

Moody’s will be forced to downgrade South Africa to below investment grade. Such a move would have very significant implications for the country’s ability to attract sufficient foreign investment - cost effectively - and on a sustained basis. Without sustainable, cost-effective foreign investment the country will perpetually struggle to achieve the growth rates needed to meaningfully reduce the level of unemployment and address the rising levels of social discord.

Read the original article at www.wealthplanning.co.za - Downgrades - the Good, the Bad and the Ugly

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