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Moody’s places South Africa on downgrade watch: Correction

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Moody'sSouth Africa’s troubled economy has been placed on review for downgrade by the ratings agency Moody’s.

Moody’s Investors Service in a notice copied to ghanabusinessnews.com says the agency on March 8, 2016 placed the Baa2 bond and issuer ratings of the government of South Africa on review for downgrade. Also placed on review for downgrade were South Africa’s (P)Baa2/(P)P-2 shelf and  the government’s Medium-Term Note Programme (MTN) programme ratings, it said.

According to Moody’s the decision to place the ratings on review was prompted by the continuing rise in risks to the country’s medium-term economic prospects and to its fiscal strength, notwithstanding the tighter fiscal stance undertaken in the 2016/17 budget.

“The review will allow Moody’s to assess to what extent government policy can stabilize the economy and restore fiscal strength in the face of heightened domestic and international market volatility,” it said.

Among other factors, Moody’s indicated that one of the drivers for the review is to allow the agency to assess the likelihood that the decline in South Africa’s economic strength will be reversed over the medium term.

Citing South Africa’s weak economic performance as a risk factor when assigning a negative outlook to the rating in December 2015, Moody’s noted then that the economy was vulnerable to further adverse global, regional, domestic and financial market dynamics, with concomitant negative implications for government revenues, the fiscal balance and the government’s debt burden.

“Last year’s growth dropped to 1.3 per cent , the slowest pace since the 2009 global financial crisis,” Moody’s said.

The ratings agency states that since then, growth prospects have worsened, and therefore, it expects growth to decline still further, to 0.5% per cent in 2016, as a consequence of the intensification of this year’s drought, low commodity prices as well as the volatility in global and domestic financial markets since December, resulting in a further steep depreciation of the exchange rate and widening bond yields.

“The drought has necessitated imports of key grain crops and pushed up food prices and overall inflation rates, leading to interest rate rises which have further undermined growth. This has also led the government to reallocate spending from other areas to provide drought relief,” Moody’s said.

Downgrading South Africa from its current Baa2 rating means the country would slide to Baa3. Another downgrade from this rating would put the country into junk status, which would have dire economic consequences on the country’s economy. Investors are barred from investing in countries in junk status.

By Emmanuel K. Dogbevi

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