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Moody's says weaker SA fiscal outlook a credit negative

The rand turned weaker after Moody's report was released. It fell 0.22% against the dollar, more than erasing a 0.41% gain earlier in the session.

A sign for Moody's rating agency stands in front of the company headquarters in New York in 2012. Picture: AFP.

JOHANNESBURG - Moody's said on Friday that a weaker fiscal outlook in South Africa's medium-term budget policy statement issued this week was a credit negative, triggering a fall in the rand.

Finance Minister Tito Mboweni predicted wider budget deficits and cut growth forecasts in his medium-term budget on Wednesday, laying bare the challenges he faces at a time of revenue shortfalls and ballooning debt.

"The government's revised budget policy statement projects larger fiscal deficits and higher government debt, amid slower growth, a weaker rand and higher interest rates than expected in February, a credit negative," Moody's said in a research note.

"Government debt is now likely to stabilise later and at a higher level than we previously expected."

Moody's is the last of the top three agencies to keep an investment grade rating on South Africa.

The rand turned weaker after Moody's report was released. It fell 0.22% against the dollar, more than erasing a 0.41% gain earlier in the session.

"The market is sensitive to what Moody's says," ETM economist Halen Bothma said.

"There was a lot of disappointment about the mid-term budget. The needle for a potential downgrade has shifted higher, especially with no signs of the fiscal debt improving," he added.

'RAND LIKELY TO WEAKEN AFTER MOODY'S ANNOUNCEMENT'

An economist says the rand is likely to weaken following Moody's negative credit rating of South Africa's mid-term budget.

Although some economists were optimistic after the budget speech as it showed a clear commitment to stabilising government finances, it seems rating agency Moody's wasn't as impressed.

Investec economist Annabel Bishop explains the rating.

“There is comment that the Medium-Term Budget Policy Statement is credit negative, which means it is negative for the rating in terms of South Africa’s finances and creditworthiness as in being able to pay it back. Essentially, there’s a possibility now that Moody's could put us on a negative outlook.”

Bishop adds this could spell even more trouble for the rand.

“After the budget speech, we can quite substantially [move] towards the 14-15 mark, if not beyond. And obviously, news of Moody’s saying that the Medium-term Budget Policy Statement is credit negative could contribute to some further rand weakness.”