November 11, 2014 / 1:51 PM / 5 years ago

South Africa's ailing economy puts investment grade credit status in jeopardy

* South Africa debt nearly 50 pct of GDP

* Opposition says downgrade shows lack of confidence in govt

* Weak economic prospects worry ratings agencies

By Stella Mapenzauswa

JOHANNESBURG, Nov 11 (Reuters) - South Africa risks losing its coveted investment grade credit status within five years if it fails to recover from an economic slump that prompted a downgrade by Moody’s last week.

Moody’s decision piled more pressure on President Jacob Zuma’s administration as it struggles to rein in public debt, now nearing 50 percent of economic output, compared with about 27 percent just five years ago.

Weak public revenues and sluggish exports have saddled Africa’s most advanced economy with persistently high deficits on both the budget and the current account, making the rand vulnerable to portfolio outflows during bouts of global risk aversion.

“Because of those two deficiencies, if we maintain things at this pace, within five years we could easily be at speculative (or junk) territory,” said Isaac Matshego, a senior economist at Nedbank.

Lengthy industrial action in the mining sector has also harmed Africa’s biggest economy after Nigeria.

The rand hit a five-week low of 11.3570 against the dollar and government bond yields touched three-week highs after Moody’s cut South Africa’s rating to Baa2 from Baa1, citing poor growth prospects and rising debt.

Analysts had largely anticipated the move, particularly after Standard & Poor’s downgraded South Africa in June while Fitch changed its outlook to negative from stable.

It was nevertheless a setback for Finance Minister Nhlanhla Nene, who had vowed to bring the budget deficit down from 4.1 percent of GDP in an Oct. 22 medium-term budget statement seen partly aimed at appeasing ratings agencies.

“It is an indictment of the finance minister that Moody’s downgraded our debt status only 16 days after his speech,” Dion George, the opposition party’s Treasury chief, said in a statement.

“Clearly, he did not inspire confidence.”

The latest downgrade takes South Africa further away from its highest grade from Moody’s — A3 in 2009 — and leaves it two notches above junk status, on a par with Fitch.

Standards & Poor’s BBB- rating is just one step away from junk status.

South Africa was last rated below investment grade in 2000, by S&P and Fitch. Moody’s has rated it investment grade since it gave the country a credit rating in 1994.

Both Fitch and S&P are due to review the country’s rating on Dec. 12, with the ailing economy, a potential lengthy public sector strike next year and the government’s ability to contain the public sector wage bill likely to be in focus.

Economic growth, which averaged 5 percent in the five years before a 2009 recession, has languished below 2 percent since then, undermining revenue collection and forcing the government to borrow about 150 billion rand ($13 billion) a year to meet expenditure.

The government now forecasts growth of only 1.4 percent this year, down from its prediction in February for 2.7 percent and compared with 1.9 percent last year.

“Over the next few years, South Africa’s economy is likely to grow much more slowly than much of the EM (emerging markets’) world,” said Capital Economics analyst Jack Allen. “This means that rising levels of debt could be more of a problem.” (Editing by Joe Brock and Susan Fenton)

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