Credit rating agency Moody’s Investors Service cut its rating of South Africa’s government bonds yesterday, a move that underscores mounting worries about the government’s ability to spur economic growth, reduce unemployment, boost competitiveness and stem rising discontent among the poor.
The agency cut the debt rating by one notch to Baa1 from A3, and said the rating outlook remained negative.
It is the country’s first credit rating downgrade since 1994. More than anything else, the downgrade should serve as a wake-up call to the ANC to put South Africa’s economy on a sustainable footing in order to reduce massive unemployment and rising inequality.
Moody’s warned in November last year, when it slashed its outlook on long-term foreign currency and local currency debt rating to negative from stable, that the country faced the prospect of a downgrade because pressure from society at large, as well as the ANC and its allies, threatened to force the government to abandon its tight rein on fiscal policy.
That pronouncement was slammed by the government as “superficial”.
Credit ratings influence government borrowing costs and investor appetite for local assets.
“The downgrade occurred because Moody’s does not believe the state has as much capacity to solve the country’s socio-economic challenges as [Moody’s] first thought,” Peter Attard Montalto, a director and emerging markets economist at Nomura International in London, said. “This is much earlier than we expected, we thought they would wait till after [the ANC conference in] Mangaung in December.”
The downgrade comes at a time when the government is confronted by a surging wave of labour unrest that has rocked the platinum mining industry and has now spread to the gold mining and transport sectors. More than 45 people have died in the unrest, including 34 striking miners who were shot dead in a confrontation with police at Marikana in Rustenburg last month.
Moody’s said that the key drivers for the downgrade included its reassessment of a decline in the government’s institutional strength amid increased socio-economic stresses and the resulting diminished capacity to manage the country’s growth and competitiveness risks.
Shrinking headroom for counter-cyclical policy actions, given the deterioration in the government’s debt metrics since 2008, the uncertain revenue prospects and the already low level of interest rates also factored into its decision, as well as the challenges posed by a negative investment climate in light of infrastructure shortfalls, relatively high labour costs despite high unemployment, and increased concerns about South Africa’s future political stability.
“The revision reflects Moody’s view of the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth,” the US-based agency said.
The downgrade takes Moody’s rating on government bonds to the same level as the other two main rating agencies, Fitch and Standard & Poor’s.
Malcolm Charles, a portfolio manager at Investec Asset Management, said the downgrade was probably the most expected rating action and was therefore no surprise. The expected impact had already been largely factored in by the market.
Even so, “this action sends a message that as a country, our challenge is to ensure we remain focused on creating an investment-friendly environment that creates jobs”, he added.
Going forward, the government will have to convince investors more forcefully that it has the right policy response to deal with the social and economic strains that threaten to reverse some of the gains that the country has made over the last 18 years.
In its response, the Treasury said the government was committed to taking the necessary measures to lift the growth potential and competitiveness of the economy.
“All of the reasons given by Moody’s for the downgrade are currently being addressed through various government programmes. Some of the drivers of the downgrade have their roots in the protracted crisis in the euro zone, South Africa’s significant trading partner,” it said.