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Moody's cuts SA by one notch

10 June 2017 - 11:09 By ROXANNE HENDERSON

Moody's Investors Service has taken a dim view of South Africa's political shenanigans, and cut the country's credit rating late on Friday by one notch to Baa3, just above junk status, and assigned a negative outlook, news which hit the rand hard.The main points raised were that the country's institutional framework and governance had materially deteriorated and were expected to affect economic growth. Dlamini-Zuma’s R250,000 Gupta award prize was from laundered money, affidavit alleges S&P Global Ratings and Fitch have both downgraded South Africa's foreign currency debt to junk, while Fitch also downgraded the country's local currency debt to junk.In particular Moody's mentioned the cabinet reshuffle in March as posing a threat to GDP growth, and that uncertainty over policy priorities had damaged investor confidence. Moody's is also concerned about state-owned enterprises, which it says continue to pose a risk to the country's fiscal strength."It is unlikely that a political consensus will emerge which supports investment in the economy and reinvigorates the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the government's balance sheet. Cabinet urges business‚ labour to tackle recession "The opposite scenario, of heightened political dysfunction, continued gradual institutional weakening and diminished clarity over policy objectives, has a higher likelihood," Moody's said in explaining the rationale for the rating decision.Shortly after Moody's made its announcement on Friday the rand weakened 10c to R12.96/$, its weakest level this week.The Treasury said in a statement "policy transparency and continuity remain on top of government's agenda and the ruling party in 2017". It added the ANC's policy conference in June and the elective conference in December "are not expected to translate to policy changes"."The urgent priority is reigniting confidence as well as reclaiming and maintaining the investment grade ratings," the Treasury said.But concerns over the political dysfunction are widespread.Mcebisi Jonas, former deputy finance minister, speaking on Friday at the Sunday Times Top 100 Companies' The Directors Event , said: "The state has a critical role to play in driving [the] radical economic reform agenda. We have to accept some of our own weaknesses which include a lack of focus on policy, insufficient technical ability within the state and the capture by narrow political-business complexes."Part of what constrains government's ability to effect transformation and drive growth are the high levels of corruption and capture within the system."Jonas said corruption fed into the increasing costs of doing business in South Africa, with inefficient state-owned enterprises driving up utility costs. "That means less investment and no jobs in the economy. So there is a real connection between dealing with the issues of state capture and growing the economy."His comments came in the same week that data from Statistics SA showed South Africa was in a recession after growth contracted 0.7% in the first quarter of 2017 following a contraction in the fourth quarter of 2016. Earlier this month unemployment spiked to a 13-year high of 27.7%.Jonas said: "We must brace ourselves for a difficult future unless we do something [to address economic challenges]. Normally the growth trajectory of South Africa trails the global trends, but what you have now is a reflection of domestic factors. We've got to address business confidence and consumer confidence."Public confidence in the state and public confidence in the elite is weakening and that's dangerous."Factors in South Africa's favour, according to Moody's, are deep domestic financial markets, a well capitalised banking sector and low foreign currency debt.While some economists have advocated a sharp interest-rate cut to keep the economy afloat, others say this mightprovide only marginal relief for consumers and is unlikely to stimulate growth.This is because South Africa's weak economic growth is mainly linked to low confidence as a result of political uncertainty.Johann Els, an Old Mutual Investment Group senior economist, said the benefits of a rate cut were probably not that significant in terms of the impact on consumers, but would send a message that would probably help improve confidence.Though inflation is currently at 5.3%, close to the upper end of the target band, Els said inflation would fall in the coming months. This, coupled with potential risk of further credit-rating downgrades down the line, rather than in the next few months, gives the Reserve Bank a window of opportunity to slash rates and stimulate the economy, Els said. But Jason Muscat, an FNB economic analyst, said the bank's goal was not to boost growth directly. "The Reserve Bank's primary mandate is to keep inflation between 3% and 6% so that South Africans are protected from runaway prices. They are mindful of economic growth, but are unlikely to cut if they feel there are upside risks to the inflation outlook."The real issue is a crisis of confidence, not only business confidence, but consumer confidence; there is nothing the [Reserve Bank] can do to change that."Lumkile Mondi, a senior lecturer at the School of Economic and Business Sciences at the University of the Witwatersrand, said: "South Africans should brace themselves for tax hikes next year, unless government can shrink [expenditure] by cutting down the number of ministries ... including retrenchments in bloated departments." - Additional reporting by Pericles Anetoshendersonr@sundaytimes.co.za..

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