Moody’s puts South Africa’s A3 rating on negative

09 November 2011 - 14:12 By Reuters
Image: Gallo Images/Thinkstock

Ratings agency Moody’s downgraded the outlook on South Africa’s ratings on Wednesday due to worries that political pressure from unions and black voters wanting greater economic redress for the ills of apartheid could erode the country’s finances.  

Moody’s put South Africa’s A3 rating on negative from stable and said there was “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”.  

In its three-year fiscal policy framework unveiled last month, the Treasury said the budget deficit for this year would be higher than previously anticipated at 5.5% while weak growth would result in lower revenues.  

The rand extended its losses after the outlook downgrade, falling more than 2% to a session low of 7.9720 against the dollar.  

Government bonds also weakened, with the yield on the 2015 bond up 10 basis points to 6.47% while that on the 2026 note climbed 11.5 basis points to 8.295%.  

South Africa’s fiscal accounts were in surplus for two years before the recession in 2009 but swung back into deficit as the government spent more to counter the effects of a global slowdown.  

More than a million people lost jobs in the recession, and millions of the poor are becoming increasingly disillusioned with the government of the African National Congress (ANC), raising the risk of social instability.  

Moody’s said the ANC’s “unwillingness to definitively reject demands from certain segments of the political spectrum for more activist policy interventions was harmful to South Africa’s economic prospects”.  

Investors have been unsettled for two years by talk from the ANC’s youth wing to nationalise mines. The ANC has said nationalisation is not government policy but has not dismissed it out of hand.  

Absa Capital said it was a ratings downgrade was unlikely to ensue unless the political noise became a reality.  

“Calls for a greater state involvement in the economy and for a larger push on redistribution are being made very loudly from some parts of the ANC sphere, but it remains far from clear as to what changes in broad policy, if any, might be agreed in the course of 2012,” it said in a note.  

“We do not believe that a ratings – rather than outlook – downgrade is likely until more clarity on the outcomes of these policy debates is delivered.”