Executive Summary

  • In this short note, we provide a brief background of Moody’s credit rating of the sovereign, a breakdown of the methodology, recent developments and our expectations going forward.
  • Moody’s sovereign risk analysis uses four broad factors: Economic Strength, Institutional Strength, Fiscal Strength, and Susceptibility to Event Risk. SA’s credit rating is determined by a matrix which comprises government’s financial strength (made up of economic, institutional and fiscal strength) and its susceptibility to event risk. Currently, Moody’s assesses the government’s financial strength as ‘Moderate (+)’ and its susceptibility to event risk as ‘Moderate (-)’, to give us a rating of Baa3. We present a few scenarios regarding the Moody’s credit rating, given recent comments by the ratings agency.
  • The current environment has proven that there is a lack of focus on growth-enhancing policy prioritisation, given the skew in focus to political developments. At the MTBPS we anticipate rising debt levels and a significant revenue shortfall to be among the prominent features, while rising contingent liabilities of SOEs, deteriorating governance levels and deteriorating institutional independence may persist, albeit gradually over the next two years. We are likely to see SA’s credit rating fall a notch by 1H18 (Moody’s) to Ba1 (both LC and FC).
  • We believe that Moody’s could lower SA’s FC and LC credit ratings to Ba1 at the November 2017 review, if the MTBPS signals material fiscal slippage. While there is a risk of a ratings downgrade from both Moody’s and S&P in November 2017, we believe that Fitch could reduce its outlook to negative from stable in the event of material fiscal slippage. In either case, we continue to project downgrades before the end of 1H18.
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