Ousting of Mbeki a red flag - Moody's
June 26, 2009
By Ethel Hazelhurst
Last year's ousting of Thabo Mbeki from the presidency raised a red flag about the reliability of South Africa's institutions.
This view was expressed by Kristin Lindow, the lead analyst for South Africa's sovereign rating at Moody's Investors Service, in a presentation in Johannesburg yesterday.
Institutional strength - the way a country regulates its affairs - was one of the reasons South Africa had an A-level investment grade rating, she said.
There was a danger that the way Mbeki was forced to resign could set a precedent that would allow future presidents to be removed if they failed to comply with ANC demands.
Elaborating on her point afterwards, Lindow said there had been "accusations by some commentators that (the ousting) was extra-constitutional, because it did not happen in Parliament when Mbeki lost a vote of confidence. Instead, the party leaders met the president and… they announced he was going to resign."
However, surveys of foreign investors showed that they, as well as Moody's, were largely satisfied with the process that brought President Jacob Zuma to power in April. But she warned that another presidential ousting would make the country appear politically unstable and would "compromise the rating".
Ratings issued by international agencies influence the cost of borrowing in global markets, which has a knock-on effect throughout the economy. Users or taxpayers ultimately foot the interest bill - for instance, on borrowing to finance Eskom's expansion programme.
Lindow is conducting the annual review of the country's sovereign rating for Moody's. The outcome will be published by the middle of next month.
In January 2005, Moody's awarded South Africa a Baa1 foreign currency rating - two notches higher than the lowest investment grade rating. The outlook was revised upward from stable to positive in June 2007. The rating was reaffirmed in March, but the A2 rating on local bonds was placed on review for a downgrade because of "fiscal pressures" - the government's rising budget deficit as revenue collection falters.
Lindow said it was important for South Africa to remain "market friendly" to attract investment flows.
Without foreign investment to compensate for the lack of local savings, the country will be unable to grow productive capacity and provide jobs.
Lindow said that without foreign savings the country could not achieve economic growth of more than 5 percent a year - the target set in 2006.
In the current environment, as tax revenues were falling and demands on the state purse were high, she said, "effective spending" was key to promoting growth. On inflation targeting, she said an anchor for inflation expectations was essential. If targeting was dropped, another anchor would have to be found.
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