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Moody’s outlook more significant than potential downgrade decision

24 November 2016 Rian le Roux, Old Mutual Investments
Rian le Roux, chief economist at Old Mutual Investment Group.

Rian le Roux, chief economist at Old Mutual Investment Group.

Amidst worsening unemployment figures and sustained weak domestic demand, South Africa’s fears of having its credit rating downgraded have intensified as they await Moody’s rating review this week and S&P’s review next Friday.

While a Moody’s downgrade to South Africa’s sovereign rating from its current rating of two levels above junk will be a disappointment, bringing us to only one notch away from sub-investment grade, a more significant indication will be whether it changes its current outlook from negative to stable, and what this will reveal about S&P’s rating decision next week.

This is according to Old Mutual Investment Group chief economist, Rian le Roux, who says that a ratings downgrade from Moody’s would not come as a major surprise and doesn’t pose as big a risk to the market as a downgrade by S&P, which currently has South Africa’s rating hanging on at only one level above junk status.

“If Moody’s does decide to downgrade South Africa’s credit rating, it would simply align their rating with that of S&P and Fitch. However, in the event of such a downgrade, the important thing to observe will be whether Moody’s revise their outlook from negative to stable. A stable outlook would indicate little to no intention to downgrade to junk any time soon, which will be viewed in a positive light by investors” Le Roux explains.

Given our current economic environment, Le Roux believes that S&P could downgrade South Africa’s local rating, however he does not expect them to downgrade the sovereign rating. “If S&P does leave our rating unchanged, this will buy South Africa little more time to get its house in order, implementing some much-needed reforms and consolidating the tentative progress that the SA economy is making,” says Le Roux. “This begs the question of if S&P doesn’t downgrade us next week, will it happen at all?”

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