SA flirting with junk

Moody's has reiterated its warning that recent attacks on the independence of the South African Reserve Bank (SARB) and judiciary, if not contained, might move SA closer to a junk investment rating.

Speaking at the Moody's 12th annual sub-Saharan Africa summit on Wednesday, the rating agency's lead sovereign analyst for SA, Zuzana Brixiova, said the country's rating outlook hinges on the strength and independence of the central bank and the judiciary.

“The judiciary and the SARB are already strong institutions. [A downgrade to junk would happen if] the strength and independence of the key institutions notably diminishes,” said Brixiova.

In June, Moody's cut South Africa's sovereign credit ratings to one notch above junk. In specific terms, the country's sovereign credit rating was cut to Baa3 from Baa2.

It also retained the ratings on a “negative” outlook, saying it was concerned about South Africa's economic growth outlook and whether government debt could be stabilised in the current political climate. This raised fears of another downgrade in December.

The key drivers of the downgrade by Moody's include the weakening of South Africa's institutional framework, reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms.

Public Protector Busisiwe Mkhwebane has called for changes to the constitution and the SARB's mandate of protecting the currency and keeping inflation in check. This was part of Mkhwebane's remedial action in her Absa-SARB “lifeboat” report which was recently set aside by the court.

Brixiova said the independence and strength of the SARB were being tested, but the central bank's mandate “has been performing well for economic stability”.

Moody's sees the attacks on the central bank as part of the political noise, which may “distract government” from its economic and fiscal framework reforms.

South Africa's judiciary has been accused of judicial overreach in its wide court judgments on government mismanagement of state funds and public policy formations that are not in line with the constitution. A key example of this is the recently announced Mining Charter.

Moody's indicated that its concerns about the domestic economy were mounting. Its main fears were that the government could increase public spending in response to poverty and unemployment, which could complicate government's fiscal consolidation plans and state reform commitments ahead of the national elections in 2019.

A slowdown in fiscal consolidation as a result of increased social spending would impact business confidence and limit the prospects of long-term economic growth, said Brixiova.

She said the rating agency was concerned about the country's unemployment rate and poverty trends, which might burden the fiscus. Already, government's contingent liabilities and debt has doubled since 2008, which continues to erode fiscal strength.

“However, the pace of debt accumulation by the government has slowed, which is good for contingent liabilities,” said Brixiova.

Moody's also warned that ANC government's “radical economic transformation” policy focus, land expropriation, preferential procurement and other forms of affirmative action could deter investment.

The green shoots for South Africa are that it has deep and liquid financial markets and has low foreign currency debt, which is good for protecting it from currency shocks. The global economy is positive, which is good for exporting regions such as South Africa.

MONEYWEB