S Africa's credit rating hit by political tumult

Moody's downgraded South Africa's credit rating by one notch on Thursday, citing concerns about the government's ability to tackle economic problems and warning political jostling within the ruling ANC could prompt further cuts. The drop to a Baa1 rating will likely spell higher government borrowing costs in Africa's largest economy and will further spook investors already worried by rolling strikes, creaking infrastructure and political instability. Moody's said a "decline in the government's institutional strength," coupled with rising socio-economic stress spelt an increased risk to those buying South African bonds. "The revision reflects Moody's view of the South African authorities' reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth." "The fractious domestic environment is not conducive to the reforms being implemented at present." The warning will ring alarm bells for many. Political stability has long been South Africa's strongest asset, setting it apart for neighbouring African nations. Moody's also warned that further cuts could come, taking South Africa perilously close to junk bond status. Of concern was the jostling within the ruling ANC ahead of a key meeting in Manguang in December that will decide who will run the party and, de facto, the country for the next five years. Incumbent Jacob Zuma is seen being vulnerable to a leadership challenge, much like the one that brought him to the helm of the ANC five years ago. Moody's warned that against the backdrop of that political horse race, with factions seeking to shore up their support, more extreme policies were possible. "Increasingly interventionist strategies are highly likely," Moody's said. Markets immediately reacted to Moody's brutally candid take on the economy with the rand slumping against the dollar, euro and pound. Peter Attard Montalto, an analyst with Japanese bank Nomura, said the downgrade came much sooner than expected and spelt more trouble ahead for South Africa. "The government has totally underestimated the potential for a downgrade," he said. "The prospect for further downgrades from other agencies remains very high, and for that likelihood to rise yet further after Mangaung." In a statement South Africa's Treasury insisted "the core of South Africa's policies remains stable and predictable." It added "all of the reasons given by Moody's for the downgrade are currently being addressed" by the government, citing plans to improve infrastructure, strengthening fiscal buffers, improve competitiveness and invest in education. "(The) government remains committed to taking the necessary measures to lift the growth potential and competitiveness of the South African economy."