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Moody's maintains SA's rating above junk at Baa3

25 November 2017

S&P Global Ratings lowered South Africa's credit rating further into "junk" territory on Friday, citing the country's deteriorating public finances and weak economic growth outlook.

Ratings agency Moody's on Friday decided against downgrading South African debt to sub-investment grade, instead putting the rating on review for a possible downgrade if the economy continued to weaken.

Fitch downgraded SA to BB+ from BB- on both foreign and local currency debt in early April after a Cabinet reshuffle that saw finance minister Pravin Gordhan dismissed.

"The downgrade reflects our opinion of further deterioration of South Africa's economic outlook and its public finances".

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S&P raised the outlook on both the foreign currency and local currency ratings to stable from negative.

"We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilise public finances in the near term, contrary to our previous expectations".

The ruling party's conference in December is set to elect a successor to President Jacob Zuma as its head.

But Moody's decision to only place South Africa on review for a downgrade may have prevented a larger sell-off in the currency.

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The rand initially fell to R14.15 to the dollar, from R13.88, soon after the announcement but recovered to R14.10 shortly thereafter.

The review, Moody's said, will allow the rating agency to assess the South African authorities' willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities.

Moody's maintained its sovereign rating for SA at Baa3, which equates to BBB- in S&P's and Fitch's nomenclature.

A one-notch cut of the local-currency rating by Moody's and S&P is set to trigger forced selling of up to $12 billion of the country's bonds as index-tracking and rating-constrained funds are forced to sell.

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Moody's maintains SA's rating above junk at Baa3