Moody’s says it has noticed financial underperformance and weak governance in SA

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Moody’s says it has noticed financial underperformance and weak governance in SA

10:21 CAT | 15 Sep 2016

There is a lack of progress in implementing reforms at state-owned enterprises (SOEs), which may ultimately carry costly financial implications for the government, ratings agency Moody’s says.

The agency released a credit opinion — a regular report on the country’s developments — on Thursday.

“Continued guarantees to loss-making SOEs such as South African Airways point to avoidance of difficult structural reforms. The financial underperformance and weak governance of SOEs did not go unnoticed by market funders,” Moody’s said.

The ratings agency on Wednesday put the ratings of Eskom, South African National Roads Agency Limited, Development Bank of Southern Africa, Industrial Development Corporation, and Land Bank on review for a downgrade, citing funding concerns.

This follows asset manager Futuregrowth’s decision to suspend new loans to these companies on governance and political concerns.

“While systemic funding risk for SOEs is a tail risk … the events highlight the gradual build up of fiscal sustainability risks stemming from the lack of progress with SOE reforms and related explicit and implicit contingent liabilities,” Moody’s said.

Moody’s places SA’s sovereign credit rating at Baa2 with a negative outlook. This rating is two levels above subinvestment grade or junk. A negative outlook suggests that if the situation does not improve in SA, the next action from the agency will be a downgrade.

The negative outlook recognised the downside risks associated with political in-fighting, fragility of growth recovery and pressures on the fiscal front, Moody’s said.

The possibility of renewed volatility in global financial markets was another downside risk, it added.

While the government had taken important first steps towards gradual fiscal consolidation, deeper structural reforms to revive business confidence and growth are yet to take off, the agency warned. “The increasingly contentious political landscape and uncertainty surrounding leadership at the National Treasury reduce policy predictability and investor confidence.”

Moody’s forecasts SA’s economy to grow 0.2% in 2016 before gradually recovering to 1.1% in 2017 and 2% in 2018, as some of the challenges such as low commodity prices, drought, electricity gap and high frequency of strikes, ease.

SA’s inflation outlook was now more subdued, suggesting “an extended pause” in interest-rate hikes, Moody’s said.

Source: Business Day Live