SA’s investment-grade rating depends on pace of reforms – Moody’s

Ratings firm Moody’s said on Tuesday fiscal risks and political constraints to economic reform in South Africa were reflected in its current credit rating one notch above speculative grade but that maintaining the level depended on how quickly President Cyril Ramaphosa’s government can implement promised reforms.

The agency is the last of the top three ratings firms to still rank Pretoria debt at investment grade, Baa3 with a stable outlook, and has delayed delivering a widely expected downgrade that analysts say would trigger a selloff of billions of rands of bonds, pushing up already soaring government borrowing costs.

Read: Fixing Eskom is complex, will take time – Moody’s

“A lot of the deterioration we have witnessed is embedded in the ratings level and the past downgrades. The question of course is going forward. Our expectation is stabilisation in debt,” said Moody’s lead analyst for South Africa Lucie Villa at a credit conference in Johannesburg.

Moody’s further trimmed its economic growth forecast for South Africa to 0.7% in 2019 from a June forecast of 1.0%, but kept its 2020 forecast at 1.5%.

Last week, Africa’s most developed economy recorded better than expected growth of 3.1% in the second quarter following a deep first quarter contraction, easing some of the credit downgrade fears, although lingering fears about the fate of cash-strapped state power firm Eskom have kept a downgrade a possibility.

Moody’s analyst Villa said the agency was keen to see the final government plan on the promised break-up of Eskom into three separate entities and that most of the risk to the sovereign rating depended on the implementation of reforms across the economy.

“At the political level, as things stand in terms of policy orientation, we still see a very reform-oriented executive which is why we still believe there is still some prospects of a pick-up in growth,” Villa said.

“From a credit perspective the main downside risks are actually to the longer-term perspective, so more from about 2020 to 2021 and beyond. And here we maintain our expectation of growth of 1.5%”.

Moody’s is expected to deliver its next review of South Africa’s rating in November after National Treasury has tabled its medium term budget statement.