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Moody's downgrades South Africa to Baa2

Peter Attard Montalto explains what lead to the downgrade on South Africa’s credit rating.

FILE: Moody’s decision keeps South Africa’s rating in investment grade. Picture: Supplied.

JOHANNESBURG - Moody's Ratings Agency has downgraded South Africa's investment grade credit ratings to Baa2 from Baa1 and adjusted the outlook to stable from negative.

Moody's decision keeps South Africa's rating in investment grade.

The ratings agency said the investment grade rating is a reflection of the following factors:

Its position as the most developed country in Africa, offering by far the deepest capital market and one of the most sophisticated financial systems among emerging markets.

An economy that has a diversified productive base, with substantial value-added factors from domestic sources, highly advanced infrastructure compared with most other emerging markets.

Its institutions, most notably its judiciary, that are stronger than many of its peers.

Bruce Whitfield spoke to Peter Attard Montalto, Emerging Markets Economist at Nomura on Thursday evening on key reasons for the downgrade.

"This wasn't really a surprise move. It's been clear for a long time that they were very bearish on the growth outlook. The point they are making is the National Treasury is doing the best they can to keep the depro file under control but that isn't enough to secure the credit profile of South Africa.

"The micro policy and structural constraints in the economy are also key reasons for the downgrade as well as energy shortages, deteriorating investor climate and less supportive capital market environment globally for deficit countries.

"But we're still a few notches away from junk status by Moody's, but there will probably further downgrades to come in coming years. We now expect Fitch to downgrade at its next update in December."

He adds that Moody's says the National Development Plan is potentially the medium run rescue package on the ratings for South Africa.

"It will be without a growth inducing plan, a continued slow slide down the rating scale."