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S Africa debt risks junk status after Moody’s cuts outlook

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Via Financial Times

Moody’s cut its outlook for South Africa’s rating from “stable” to “negative”, leaving the debt of Africa’s most industrialised nation on the brink of junk status.

Moody’s, the last big credit rating agency to classify South Africa as investment-grade, retained the country’s Baa3 rating on Friday.

But it warned that failure by President Cyril Ramaphosa’s government to fix slowing economic growth and rising debts may soon lead to a downgrade to junk.

“The current rating rests on the government’s ability to quickly develop a credible strategy to halt and ultimately reverse the rise in debt. Such a strategy has not been forthcoming to date,” Moody’s said.

The negative outlook signalled Moody’s concern that Mr Ramaphosa’s ruling African National Congress “will not find the political capital to implement the range of measures it intends” to restart the economy, it added.

Mr Ramaphosa promised a “new dawn” when he replaced Jacob Zuma as South Africa’s president last year after a lengthy period of rising corruption in the state.

But he has been hard pressed by vicious infighting in the ANC over reforms such as tackling a crisis at Eskom, the state power monopoly that has been called the biggest threat to the economy.

Eskom sells nearly all of South Africa’s electricity but, because of waste and corruption, it can no longer keep up payments on R450bn ($30bn) of its mostly state-guaranteed debts without government help, straining public finances to the limit.

Tito Mboweni, finance minister, warned this week that, without reforms, bailouts for Eskom and a bloated public-sector wage bill would raise state debts from less than 60 per cent of GDP to a danger level of 70 per cent over the next three years.

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Moody’s added that structural blocks in the post-apartheid economy, such as the world’s worst inequality rate and high joblessness, were sapping reform efforts “to an even greater extent than previously expected”.

Mr Mboweni’s Treasury believes that the economy will grow only 0.5 per cent this year. Factories, mines, shops and smelters have all been battered by Eskom-imposed rolling power blackouts in 2019.

A complete fall into junk status would bar South Africa’s debt from global bond indices tracked by investors, making it even more expensive to raise money on the markets.

Mr Mboweni’s next budget in February is increasingly being seen as a critical moment to turn the fiscal tide for South Africa.

“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level,” Moody’s said.

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