Rating agency Moody’s has re-affirmed the Baa1 grading for South African government debt with a negative outlook.
The news is positive for the economy as it entails no downgrade, which would have made government debt more expensive as higher interest rates would have become payable.
The decision follows that made by Standard & Poor’s (S&P) in December to keep South Africa’s credit rating unchanged at BBB. This applied to the country’s long-term foreign currency credit rating as well as its local currency credit rating at A-2. S&P also maintained a negative outlook on the rating.
In the Moody’s decision, credence was given to the government’s manageable debt position. Despite scepticism among some economists who have described South Africa’s debt as growing uncontrollably, Moody’s expects government debt to peak at 47% of gross domestic product (GDP) in 2015-16.
The commitment to medium-term spending ceilings by the government has been reiterated repeatedly. It has been recognised that counter-cyclical fiscal and monetary policies pursued since the start of the global economic crisis have arguably reached their limit, Moody’s said.
The ratio of South African government debt to GDP was a low 23% in 2008.
The rand strengthened partly on the announcement on Monday from a weakest intraday level of R10.73/$ at midday to R10.63/$ by early evening.
Moody’s did not provide an opinion on the rise of noninterest expenditure over the past few years, mainly reflecting higher salaries for public sector employees. The government has committed itself to keep this spending low until 2017.
The Moody’s outlook remained negative, citing continued tension over the government’s economic policy within the ruling tripartite alliance and heightened uncertainty over the outcome of this tension in the run-up to this year’s national election.
“Moreover, promised tax increases on mining firms would further undermine profitability in a sector already plagued by persistent strike activity,” the rating agency said.
Moody’s warned that ratings could be downgraded should government debt rise much above 45% of GDP — in particular if the deterioration occurred due to a pro-cyclical fiscal stance or heightened sociopolitical unrest that was not addressed in a manner that ensured future debt sustainability.
In a credit opinion, Kristin Ludlow, senior vice-president of Moody’s, said the death of former president Nelson Mandela last month led to considerable national and international reflection on the status of political, economic and societal progress achieved in South Africa over the past 20 years.
“Major gains have been made in the average standard of living over the period, with the emergence of a new and expanding black middle class,” she said.
Nonetheless, income disparities are among the highest in the world, sometimes wider than they were in 1994. Perceptions of heightened public corruption and continued sub-potential growth have generated a crisis of confidence among consumers and businesses as well as negative investor sentiment.
“This is problematic in light of slumping commodity process and the country’s reliance on external capital,” Ms Ludlow said.
The Treasury was not immediately available for comment, but in its response to the S&P announcement, it said S&P’s rating opinion did not take adequate account of progress made in addressing the issues that the agency had raised as potential drawbacks in its initial downgrades in 2012.
As expressed in the 2013 medium-term budget, the government remains committed to the reprioritisation of its expenditure with the aim of increasing efficient spending across all government departments, according to the Treasury.