Moody’s Corporation (NYSE:MCO) Investors Service has cut down South Africa’s government bond by one notch, from A3 to Baa1, citing a decline in institutional strength among other factors. South Africa has faced global criticism in the recent past, following periods of political instability, as exhibited in the manner in which the striking miners were handled. Reuters has published a text document detailing three crucial reasons from Moody’s Corporation (NYSE:MCO) report, which have contributed to the downgrade.
Moodys

This is not good news at all, considering that South Africa, is actually one of the economies considered to be major drivers of the global economy. The African nation was invited by China, to join the BRIC countries in 2010, thereby forming the BRICS (Brazil, Russia, India, China, and South Africa). The five nations are from the emerging markets, and are expected to dominate the global economy in the next 10 to 15 years.

South Africa is very rich in minerals, some of which include the world’s most precious commodities, like Gold, Diamonds, and Platinum, among others. The gold markets were hugely affected by the strikes, as featured in one of our articles. This also affected some of the gold mining companies, such as AngloGold Ashanti Limited (NYSE:AU), as South Africa Gold contributes about 33% of its total production.

While the strike itself may not be a major factor for the downgrade, the factors that contributed to the strike are the main drivers. The south African economy has not been doing well, as exhibited by the workers’ demand for higher salaries.

The reasons were listed as follows:

  • Moody’s reassessment of a decline in the government’s institutional strength amid increased socio-economic stresses, and the resulting diminished capacity to manage the growth and competitiveness risks.
  • Shrinking headroom for counter-cyclical policy actions, given the deterioration in the government’s debt metrics since 2008, the uncertain revenue prospects and the already-low level of interest rates.
  • The challenges posed by a negative investment climate in light of infrastructure shortfalls, relatively high labor costs despite high unemployment, and increased concerns about South Africa’s future political stability.

Moody’s Investors service is of the opinion that, South Africa still faces a dark cloud ahead, over its prospective economic recovery, which renders a negative outlook on its government bond. The country will be making critical socio-economic policy decisions in its upcoming National General Conference, and until these are actualized, then there is no positive outlook on political stability. In June, the ruling party African National Congress (ANC) left such issues unresolved, and it remains to be seen if it would be different this time around.

Today, South Africa’s 3-month bond-yield was up 0.140 basis points, or 2.63%, to stand at 5.460%, the 3 year bond yield was up 0.47%, while the 10 year bond yield rose by 0.62%. Notably, the 3 month bond was the most attractive, but it remains to be seen how the market will react to Moody’s Downgrade tomorrow.