Announcement: Moody's: Weak rand has limited impact on South Africa's Baa1 rating and negative outlook

Global Credit Research - 13 Feb 2014

New York, February 13, 2014 -- The steep depreciation of the rand will lead to only marginally lower growth than had been expected in 2014 and therefore will have a limited impact on the South African governments Baa1 rating and negative outlook, says Moody's Investors Service in the report "South Africa: Answers to Frequently Asked Questions About the Credit Impact of Election Year Politics and the Rand's Depreciation". The depreciation will, however, add to inflationary pressures in South Africa, leading to higher interest rates.

Moody's says in this election year a degree of investor uncertainty is likely contributing to the rand's weakness.

The Moody's report addresses both possible repercussions for economic policy from the election becoming increasingly competitive and the reasons why the recent steep decline in the exchange rate is unlikely to dampen growth significantly despite higher interest rates.

Criticism of the government over the continued high rate of unemployment, inadequate provision of government services and pervasive official corruption are leading to deepening dissent within the ruling African National Congress (ANC) and also between the ANC and its tripartite alliance partners, says Moody's. These complaints have also led to increasingly vociferous challenges to the way in which the ANC-led government has approached these problems over the nearly two decades that it has been in power, which will likely lead to a more competitive election.

In Moody's opinion, uncertainty as to whether the acrimonious political atmosphere could have consequences for the economic policy framework is unnerving foreign investors, who have been pulling some of their money out of the local market in recent months.

Moody's expects the weakness of the rand to have a limited impact on South African growth prospects, with the effect it does have mainly arising from slightly weaker household spending. The depreciation will eventually help to narrow the current account deficit by boosting net exports. The rating agency expects interest rates will likely only be increased to the extent warranted to keep inflation within bounds and prevent the second-round impact of the depreciation from taking hold.

Moody's says that South Africa has very low exposure to foreign currency-denominated debt, which will also mitigate the economic impact of the depreciation. The total foreign currency debt of the country was equivalent to only 16% of GDP as of the end of June 2013, much lower than for most of the country's Baa-rated peers. The impact on the government's fiscal strength will also be limited, says Moody's, because of the favorable currency composition, interest rate structure and elongated maturity profile of its debt. The sovereign's low exposure to exchange rate and interest rate volatility is a key credit strength.

These mitigating factors notwithstanding, Moody's says it expects government borrowing costs to gradually rise as global liquidity continues to tighten.

Subscribers can access the report here

Issued by Kristin S Lindow, Senior Vice President, Sovereign Risk Group, Moody's Investors Service, Inc., February 13 2014

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