South Africa braces for credit review as growth falls

November 25, 2016
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Investors who have become increasingly wary of South Africa's economic prospects under President Jacob Zuma.
Investors who have become increasingly wary of South Africa’s economic prospects under President Jacob Zuma/FILE

, JOHANNESBURG, South Africa, Nov 25 – South Africa braced for a potentially damaging credit rating review Friday as Moody’s releases its latest assessment amid political tension, reform blockages and weak economic data.

President Jacob Zuma has been engulfed by graft scandals and a power struggle with Finance Minister Pravin Gordhan, while growth has fallen to 0.5 percent and unemployment hit a 13-year high.

Moody’s will issue its updated grading later Friday, before Standard & Poor’s makes its key announcement a week later on December 2.

S&P currently has South Africa — the continent’s most developed economy — rated at the lowest investment grade, and a downgrade would put the country’s bonds into so-called “junk” status.

Moody’s currently rates South Africa two levels above junk.

Any downward review would further drain investor confidence in the country’s prospects under Zuma and the ANC party, which has ruled since the end of apartheid.

“We are politicising downgrading. That is our problem,” the president told parliament this week. “We have been working hard… and we are talking to them (rating agencies).”

Efforts to avoid junk status have been at the centre of political drama for months, with Zuma loyalists at loggerheads with Gordhan, who is widely respected among international investors.

“Zuma has focused on removing Gordhan and maintaining his grip on power, while Gordhan (has) been working very hard to avert a ratings downgrade,” the Eurasia consultancy group said in briefing note.

– Junk status looms? –

Analysts warned that Moody’s sticking to its current “negative outlook” assessment for South Africa could be a pointer to S&P’s possible downgrade to junk next week.

“A stable outlook would indicate little to no intention to downgrade to junk any time soon,” Old Mutual economist Rian le Roux said.

A junk rating by S&P could trigger a bout of bond selling by foreign investors.

Some investment funds have rules that allow them to only hold bonds that have investment-grade ratings.

Dennis Dykes, senior economist at Nedbank, told AFP that a downgrade would “have a negative but limited impact because the markets had almost a year to absorb the probability”.

Gordhan had been due to appear in court earlier this month on graft charges that many analysts saw as an attempt by Zuma associates to oust him.

The charges were dropped at the last minute, exposing deep tensions in the ANC as several ministers came out in his support.

Gordhan was appointed only last year to calm panicked investors when Zuma sacked two finance ministers within four days.

South Africa on Monday unveiled the proposed figure for its first minimum wage — 3,500 rand ($242) a month — in a move that could improve labour relations.

Gordhan and deputy president Cyril Ramaphosa have been pushing for reform of loss-making state companies, including power company Eskom and national airline South African Airways.

A recent watchdog report included allegations that Zuma ensured one business family won huge preferential contracts to supply Eskom with coal.

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