News / Africa
SA outlook changed to negative
10 Nov 2011 at 04:30hrs | Views
Johannesburg - Moody's Investors Service has changed the outlook on South Africa's A3 local and foreign currency government debt ratings to negative from stable, reflecting heightened political risk in the context of more constrained public finances.
The negative outlook also applies to the country's A1 foreign currency debt ceiling and its A3 foreign currency deposit ceiling.
The rating agency said the main drivers for the negative outlook include:
• The growing risk that the political commitment to low budget deficits and the ability to keep within current debt targets could be undermined by popular pressures and rising internal strains within the ANC, and between the ANC and its partners in the tripartite alliance.
• Expectations that growth will be somewhat slower than previously anticipated and limited to about 3% to 3.5% over the medium term - insufficient to prevent already high unemployment rates from rising further and thereby exacerbating social tensions.
• The continued negative impact on private investment deriving from calls for interventionist actions aimed at "quick fixes" for black economic opportunities.
"The primary driver behind Moody's decision to change the outlook on South Africa's government ratings to negative is the rising pressure from society at large, as well as from within the ANC and its political partners, to ease fiscal policy in order to address South Africa's high levels of poverty and unemployment.
"In Moody's view, spending beyond the substantial amounts already budgeted in response to such demands could push debt to levels more commensurate with lower-rated sovereigns.
"South Africa's direct debt and guarantees for state-owned companies' obligations currently approach or exceed 50% of GDP (gross domestic product).
"Moreover, a substantial proportion of the government budget is already absorbed by wages, social support and debt service, limiting the room for new growth-supportive spending.
"Secondly, Moody's is concerned that economic growth will be somewhat slower than previously expected in the years ahead due to a weaker global economy, depressing any rebound in South African employment levels over the coming years. This would in turn aggravate existing frustrations over the lack of economic opportunities.
"Moreover, job creation in this environment would not be enough to absorb new entrants to the labour force nor reduce the already high levels of unemployment. In Moody's opinion, this situation poses risks to political stability over the longer term.
"Thirdly, Moody's believes that the political leadership's unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions is harmful to South Africa's economic prospects, in particular private investment."
The agency also says nationalisation of the mines and/or other sectors - however unlikely to happen - would not achieve the stated aim of accelerating progress on black economic transformation. Instead, such moves are more likely to do the opposite, reducing the country's attractiveness to both local and foreign investors, and encouraging the outward migration of citizens and businesses.
"Such actions would in turn raise the risk premium on government debt, further inflating the already-rising costs of debt service," Moody's stated.
It added: "Overall, Moody's believes that the next two years will be especially challenging for South Africa's political system, with the potential for further pressures emerging for the established economic policy framework during this period.
"To date, South Africa's fiscal picture and economic policy parameters have remained generally in line with Moody's expectations, hence the continued A3 rating. The South African authorities' economic stewardship has been effective for more than a decade, during which time they brought public finances and inflation under control and significantly bolstered the country's external liquidity position.
"In addition, meaningful progress has been made in raising living standards, expanding social services and physical infrastructure, and putting in place a financial support mechanism for the most underprivileged.
"Finally, the outlook for South Africa's public finances has not diverged significantly from Moody's projections when the country entered into recession in 2009, roughly the time of Moody's last sovereign rating action, despite the rather sluggish economic recovery over the past two years."
On the subject of what could change the rating, Moody's said that hiigher domestic savings and investment rates would support a rating upgrade, as would sustainably stronger growth, restrained debt accumulation and the maintenance of sound economic policies by the current administration and its successors.
"The ratings could be downgraded in the event of a serious and durable deterioration in the debt metrics and/or heightened socio-political pressures that are not addressed in a manner consistent with future debt sustainability," the rating agency said.
The negative outlook also applies to the country's A1 foreign currency debt ceiling and its A3 foreign currency deposit ceiling.
The rating agency said the main drivers for the negative outlook include:
• The growing risk that the political commitment to low budget deficits and the ability to keep within current debt targets could be undermined by popular pressures and rising internal strains within the ANC, and between the ANC and its partners in the tripartite alliance.
• Expectations that growth will be somewhat slower than previously anticipated and limited to about 3% to 3.5% over the medium term - insufficient to prevent already high unemployment rates from rising further and thereby exacerbating social tensions.
• The continued negative impact on private investment deriving from calls for interventionist actions aimed at "quick fixes" for black economic opportunities.
"The primary driver behind Moody's decision to change the outlook on South Africa's government ratings to negative is the rising pressure from society at large, as well as from within the ANC and its political partners, to ease fiscal policy in order to address South Africa's high levels of poverty and unemployment.
"In Moody's view, spending beyond the substantial amounts already budgeted in response to such demands could push debt to levels more commensurate with lower-rated sovereigns.
"South Africa's direct debt and guarantees for state-owned companies' obligations currently approach or exceed 50% of GDP (gross domestic product).
"Moreover, a substantial proportion of the government budget is already absorbed by wages, social support and debt service, limiting the room for new growth-supportive spending.
"Secondly, Moody's is concerned that economic growth will be somewhat slower than previously expected in the years ahead due to a weaker global economy, depressing any rebound in South African employment levels over the coming years. This would in turn aggravate existing frustrations over the lack of economic opportunities.
"Moreover, job creation in this environment would not be enough to absorb new entrants to the labour force nor reduce the already high levels of unemployment. In Moody's opinion, this situation poses risks to political stability over the longer term.
The agency also says nationalisation of the mines and/or other sectors - however unlikely to happen - would not achieve the stated aim of accelerating progress on black economic transformation. Instead, such moves are more likely to do the opposite, reducing the country's attractiveness to both local and foreign investors, and encouraging the outward migration of citizens and businesses.
"Such actions would in turn raise the risk premium on government debt, further inflating the already-rising costs of debt service," Moody's stated.
It added: "Overall, Moody's believes that the next two years will be especially challenging for South Africa's political system, with the potential for further pressures emerging for the established economic policy framework during this period.
"To date, South Africa's fiscal picture and economic policy parameters have remained generally in line with Moody's expectations, hence the continued A3 rating. The South African authorities' economic stewardship has been effective for more than a decade, during which time they brought public finances and inflation under control and significantly bolstered the country's external liquidity position.
"In addition, meaningful progress has been made in raising living standards, expanding social services and physical infrastructure, and putting in place a financial support mechanism for the most underprivileged.
"Finally, the outlook for South Africa's public finances has not diverged significantly from Moody's projections when the country entered into recession in 2009, roughly the time of Moody's last sovereign rating action, despite the rather sluggish economic recovery over the past two years."
On the subject of what could change the rating, Moody's said that hiigher domestic savings and investment rates would support a rating upgrade, as would sustainably stronger growth, restrained debt accumulation and the maintenance of sound economic policies by the current administration and its successors.
"The ratings could be downgraded in the event of a serious and durable deterioration in the debt metrics and/or heightened socio-political pressures that are not addressed in a manner consistent with future debt sustainability," the rating agency said.
Source - I-Net Bridge
