Moody's Investors Service has changed the outlook on the Government of South Africa's ratings to negative from stable and affirmed the Baa3 long-term foreign-currency and local-currency issuer ratings.
Moody's also affirmed South Africa's Baa3 long-term foreign-currency and local-currency senior unsecured debt ratings, its (P)Baa3 senior unsecured medium-term note (MTN) and Shelf foreign-currency ratings, as well as its (P)P-3 short-term foreign-currency Other Short Term rating. In a related decision, Moody's changed the outlook to negative from stable on ZAR Sovereign Capital Fund Propriety Limited's rating and affirmed its Baa3 foreign-currency backed senior unsecured debt rating. ZAR Sovereign Capital Fund Propriety Limited is a special purpose vehicle whose debt issuance is ultimately the obligation of the South African government.
Moody's decision to change the outlook to negative from stable reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in South Africa's trend in growth and public debt burden, despite ongoing policy responses.
While high unemployment, income inequality and the social and political challenges they imply for policymakers are long-standing features in South Africa, the obstacles that they pose to the government's plans to raise potential growth and contain fiscal deficits are proving more severe than expected a year ago. Acute financial stress for state-owned enterprises (SOEs), in particular Eskom Holdings SOC Limited (Eskom, B2 negative), continues to require sizeable ongoing support from the government. 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.
The Baa3 rating affirmation takes into account the country's deep, stable financial sector and robust macroeconomic policy framework, set against ongoing challenges related to weak potential growth and strong fiscal pressures.
South Africa's long-term local-currency bond and bank deposits ceilings remain unchanged at A2, and the long-term and short-term foreign-currency bond ceilings are also unchanged at A3/Prime-2. The long-term foreign-currency bank deposits ceilings remain at Baa3, while the short-term foreign-currency bank deposits ceiling remains at Prime-3.
