Big blow as Moody's downgrades South Africa

Moody's Investors Service cut the government bond rating by one notch to Baa1 from A3 yesterday, citing worries about South African institutions, future political stability and room for policy manoeuvring.

The main driver of the downgrade "is Moody's lowered assessment of institutional strength to 'moderate' from 'high', an important factor in the rating agency's judgment of a sovereign's economic resiliency", it said.

It expressed concerns around the negative investment climate - from creaking infrastructure to worries about political stability.

Investor sentiment has been soured by the recent illegal strikes in the mining industry and the criticism of the government as ineffective and out of touch.

Peter Attard Montalto, an emerging markets economist at Nomura, said:. "As the strikes in South Africa spread both within the mining industry and to elsewhere in the economy, we think the prospect for further downgrades from other agencies remains very high."

Kristin Lindow, Moody's lead analyst for South Africa, said: "We think the mining issues raise investors' awareness of the country's long-standing problems."

The ANC is seen as preoccupied with its elective conference at the end of the year. Moody's cited uncertainty around Mangaung in its decision to keep the outlook negative.

In addition, South Africa - part of the so-called Brics group of major emerging markets - had "shrinking headroom for counter-cyclical policy actions", the agency said.

The Treasury said yesterday it was aware of Moody's concerns.

"All of the reasons for the downgrade are being addressed through various government programmes. Some of the drivers of the downgrade have their roots in the protracted crisis in the eurozone, South Africa's significant trading partner.

"The government remains committed to lifting growth potential and competitiveness," it said.

Standard & Poor's and Fitch both rate South Africa BBB-plus, with a negative outlook.