Home > Business, International > Moody’s downgrades South Africa’s outlook

Moody’s downgrades South Africa’s outlook

ANC election poster, trying to make political ...

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South Africa’s local and foreign currency government debt ratings outlook has been downgraded from stable to negative by Moody’s, an international rating agency. It was anticipated that South Africa would be downgraded as a result of the political environment. Rival ratings agency Standard & Poors (S&P) earlier this week said that there was no immediate cause for concern over debt in South Africa. In January Fitch and S&P both upgraded their outlooks for South Africa’s sovereign debt rating.

Global data agencies have downgraded numerous Global developed and developing countries in the wake of the 2008 financial crisis. South has recovered from the global recession but the references to nationalization of mines and leadership wrangles within the African National Congress, ANC, the ruling party have not been received well hence the downgrading of the ratings.

Neighboring Zimbabwe has been in distress with a volatile political and economic climate further puts South Africa at strain. The fragile global economy has left the rand vulnerable and has been unstable over the past few weeks. This affects investor confidence and can affect the economy of South Africa in the future. The political environment has affected the economy directly in a negative manner. Players within the political arena should realize that their actions have a spiraling effect that goes further than they anticipate. Africa has not paid enough attention to how politics affects economies and should consider actions that increase investor confidence and not diminish it.

South Africa is still in a strong position as its rating has not yet been downgraded. A downgrade will have negative implications on the cost of borrowing and economic growth. As the barometer of Africa, the rest of Africa must take a look at their own prevailing environment and always take the necessary steps required to create a favorable environment. When South Africa sneezes, the rest of Africa catches a cough. Zimababwe with its persistant challenges will catch this cough immediately.

Understanding the rating process.

  • Background and history of the company/entity Industry/sector trends
  • National political and regulatory environment
  • Management quality, experience, track record, and attitude toward risk-taking
  • Management structure Basic operating and competitive position
  • Corporate strategy and philosophy
  • Debt structure, including structural subordination and priority of claim, and
  • Financial position and sources of liquidity, including

(1) Cash flow stability and predictability and ability to service debt obligations,

(2) Operating margin, and

(3) A balance sheet analysis in terms of debt profile and maturity.

Looking at the Moody rating criteria, Zimbabwe certainly has a long way to go. It isn’t all doom and gloom because Zimbabwe does have an excellent quality and experienced management.

Categories: Business, International
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