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CAPE TOWN - International ratings agency Moody’s has warned that the continued bailouts of state-owned enterprises (SOEs) such as the R2.3 billion given to national airline South African Airways (SAA) last month pointed to continued threat to the country’s future credit outlook.

Moody’s said in credit note that the country’s future rating would depend on a decline in the value of guarantees to SOE’s and the government’s success in safeguarding South Africa’s institutional, economic and fiscal strength.

The agency said the current policy framework had become predictable and shifted in a way that was likely to undermine economic or fiscal strength. 

"It said this could lead to a further downgrade.” “Further delays in growth enhancing reforms would be suggestive of such a shift,” Moody’s said in the note.
“Downward pressure could also develop if liquidity pressures begin to re-emerge at state-owned enterprises that would elicit pronounced government intervention, be it through the activation of guarantees or other measures.” 

Last week Moody’s withheld an opinion on the country’s rating, indicating that it believed that SA had not had any real major events that would require a review. In June the ratings agency downgraded South Africa’s rating and assigned a negative outlook. 

The ailing carrier this month told Parliament that it would face a liquidity crisis if it did not receive R13bn recapitalisation to meet its obligations and cover its operational costs just weeks after the National Treasury gave it R2.3bn to settle its debt with Standard Chartered Bank.

Finance Minister Malusi Gigaba said he would pronounce on the recapitalisation and the course of action in his maiden Medium Term Budget Policy Statement (MTBPS) in October.   
Moody’s said it would change its views on the the country’s credit rating only if the government implemented policies and reforms that indicated medium-term growth and stabilised the government’s debt burden. 

The agency currently has South Africa’s long-term foreign and local currency debt ratings at Baa3 with a negative outlook, making it the only one that has the country’s foreign-currency and rand-denominated debt at investment grade. 

Moody’s which gauges economic, institutional and fiscal strength, as well as susceptibility to event risk, said that the country’s credit constraints included persistently low growth, as business confidence and investment languish, and rising policy uncertainty.  

The agency said slow growth had constrained job creation accompanied by high unemployment as well as weakening debt metrics.  

Peter Attard Montalto, a research analyst at Nomura, said that pragmatism around the MTBPS and a substantial hole in the budget, as well as the wider context of requiring budget neutrality on SOE bailouts, would create the necessary backdrop for a more pragmatic view from Gigaba.

“We believe that the issue of parastatals, their risks, governance, funding restraints and links to the sovereign will become an increasingly important issue for the rating agencies, and ultimately be a contributory factor in pushing both Standard and Poor’s and Moody’s over the edge into junk status,” Montalto said.