SA’s odds of downgrade less than 50%

Moody’s warns cut still likely if growth drops

INTERNATIONAL ratings agency Moody’s has reduced the possibility of South Africa’s credit downgrade in November to less than 50 percent.

Moody’s lessened the possibility yesterday but warned that a cut was still likely if economic growth fell below the estimated 0.2 percent this year.

The rand rose 0.7 percent against the dollar, partly boosted by these comments.

The rand opened at R13.912 to reach R13.8652 by 5pm.

Moody’s warned that any move to arrest Finance Minister Pravin Gordhan would threaten the continuation of current economic policy.

Downward risk

Moody’s rated South Africa two notches above sub-investment grade at Baa2, with a negative outlook, and has warned that political infighting, weak economic growth and mounting debt at state-owned entities all posed a downward risk. Moody’s next review is expected on November 25.

Fitch Ratings and S&P Global Ratings assessed the debt at one level above junk.

A decline to non-investment grade could lead to capital outflows at a time when the economy is expanding at the slowest pace since 2009.

Moody’s analyst, Kristin Lindow, told an annual conference in Johannesburg that the agency did not expect to upgrade the Baa2 rating for the country in the near future.

“Fundamentally because the rating has a negative outlook, we don’t expect that we would upgrade the rating in the near future,” Lindow said.

“We would likely downgrade the rating in the absence of a growth recovery that we are anticipating… that takes growth to around 2 percent gradually over the next several years.”

Moody’s said it expected South Africa’s growth to tick up to 1.1 percent next year and 2 percent the year after.

“We have a negative outlook which means the risks (to the rating) are tilted to the downside,” Moody’s analyst Zuzana Brixiova said. “But having said that… fundamentally we expect that the probability of a downgrade is less than 50 percent, it’s about one-third.”

South Africa is struggling to revitalise the economy and contain public debt in the face of warnings by ratings companies of possible downgrades.

A decline to non-investment grade may probably lead to capital outflows.

Moody’s has said it is seeking progress on government and business efforts to boost economic expansion and may downgrade the nation if debt climbs and if political uncertainty starts to impede growth.

Lindow said debt metrics would probably stabilise and even decline this year.

Consolidating gains

Meanwhile, the rand strengthened yesterday, consolidating gains that saw it rally to near two-week highs against the dollar as investors anticipating a rate hold by the Federal Reserve kept demand for the local currency alive.

The SA Reserve Bank is likely to keep the policy rate at 7 percent tomorrow.

Another inflation reading below the Reserve Bank’s expectations is likely to put pressure on its monetary policy committee.

It revised down its inflation projections for this year and next year at its last three meetings and might have to make further adjustments.

The rand recently pared gains since the Reserve Bank’s decision in July, when it acknowledged that the domestic currency was stronger than it had anticipated.

Inflation also came in at 6 percent in July, substantially below the 6.5 percent the bank was currently projecting for the third quarter. – Additional reporting by Reuters and Bloomberg