Bloomberg News

South African Credit Rating Outlook Cut on Political Risk

November 09, 2011

(Updates with comment from National Treasury in fifth paragraph, rand in the seventh.)

Nov. 9 (Bloomberg) -- South Africa’s credit-ratings outlook was lowered to negative by Moody’s Investors Service, indicating it may downgrade the nation’s debt from A3, as “heightened political risk” and spending demands put pressure on public finances.

The outlook was reduced from stable, Moody’s said in a statement today. The rating is the fourth-lowest investment- grade level. Standard & Poor’s rates South Africa’s debt at BBB+, one level lower than Moody’s.

Finance Minister Pravin Gordhan forecast on Oct. 25 a budget deficit of 5.5 percent of gross domestic product in the year through March, compared with 4.6 percent last year, as the economy’s recovery stalls and the government misses revenue targets. Gordhan has little room to rein in spending as labor unions push the government to do more to boost jobs and the youth wing of the ruling African National Congress calls for mines to be nationalized.

Moody’s action was driven by “the 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 and rising internal strains within the African National Congress” and its labor union allies, the ratings company said.

South Africa disagrees and is “disappointed” with Moody’s decision, the National Treasury said in an e-mailed statement today. The global environment was the main reason for Moody’s action and an improvement in growth will boost South Africa’s public revenue once again, the statement said.

Political Risk

“We disagree with the assessment of political risk in South Africa,” the Treasury said in the statement. “We note that the decision to revise the outlook comes after a recent clear fiscal policy statement of government, the Medium Term Budget Policy Statement tabled in October.”

Gordhan lowered his forecast for economic growth to 3.1 percent this year and 3.4 percent in 2012 from 3.4 percent and 4.1 percent respectively. Growth that’s slower than estimated may add to job losses and worsen social tensions in the country, increasing calls for “interventionist” policies to boost ownership by black people in the economy, Moody’s said.

The rand reversed an earlier gain, weakening 1.8 percent to 8.0038 per dollar at 6:15 p.m. in Johannesburg. The yield on the benchmark rand bond due in 2015 rose 11 basis points, or 0.11 percentage point, to 6.49 percent.

“No one had really been expecting this reaction in outlook,” said Leon Myburgh, sub-Saharan Africa strategist at Citigroup Inc. in Johannesburg, in a telephone interview. “I don’t think there will be a downgrade any time soon.”

Debt Accumulation

Higher domestic savings and investment rates, stronger economic growth and “restrained debt accumulation” will support a credit rating upgrade, Moody’s said.

“The ratings could be downgraded in the event of a serious and durable deterioration in the debt metrics and/or heightened socio-political pressures that are not addressed in a manner consistent with future debt,” Moody’s said.

ANC Youth League President Julius Malema has called for the nationalization of mines in South Africa, the world’s largest producer of platinum and chrome. Malema has said his wing of the party will withhold support from ANC members who don’t support their policies. The ANC holds elections in December next year, which will determine the party’s candidate for president.

--With assistance from Maria Ermakova in London. Editors: Nasreen Seria, Vernon Wessels, Dulue Mbachu

To contact the reporter on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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