JOHANNESBURG – Rating agency Moody’s yesterday warned that South Africa and some of its emerging market peers, such as Turkey, Argentina and Brazil, faced heightened risks due to weak institutions, unpredictable domestic politics and geopolitical risk.
Alastair Wilson, Moody’s managing director for global sovereign risk, said South Africa also had below-trend growth prospects.
“South Africa’s vulnerability similarly reflects high reliance on external capital (though mainly denominated in local currency), set against a context of a moribund economy, high inequality and political stasis ahead of the 2019 presidential elections,” Wilson said.
The Finance Ministry last month halved its South African growth forecast from 1.5 percent to 0.7 percent but expects growth to reach 2.3 percent in 2021.
One potential challenge facing the country was the foreign ownership of assets. Foreign holdings of rand-denominated bonds are the highest among emerging markets at 41 percent.
Foreign investors hold nearly $20 billion (R285.42bn) in government local currency debt, making them susceptible to investor sentiment and US interest rates fluctuations.
Moody’s, which remains the last of the three big credit rating agencies to put South Africa’s credit rating at investment grade, said US trade policy would remain the most potent source of geopolitical risk next year.
Neil Wilson, a chief market analyst for Markets.com, said a Republican Party clean sweep in the midterms would support further deregulation and tax-cutting measures, which will be positive for US stocks and the dollar.
“It would be the necessary catalyst for this decade-old bull market to have one last hurrah, pushing back up to 27 000 and beyond on the Dow and potentially 3 000 on the S&P 500 before the inevitable correction and bear market,” Wilson said.
Moody’s has yet to deliver its country review on South Africa, while Standard & Poor’s is scheduled to do so this month.
Annabel Bishop, a chief economist at Investec, said the probability of South Africa losing credit rating was elevated in Finance Minister Tito Mbweni’s Medium Term Budget Policy Statement last month, which prompted a credit negative reaction from Moody’s.
”We continue to expect that Moody’s will downgrade South Africa’s outlook to negative this year, but keep the country rating on the last investment grade level. A negative outlook signals a future ratings downgrade, a stable outlook no downgrade (or upgrade),” Bishop said.
“A downgrade to the outlook, therefore, increases the chance of an actual credit rating downgrade.”