South Africa on edge before Moody's rating review amid power crisis

By Olivia Kumwenda-Mtambo

JOHANNESBURG (Reuters) - South African markets are on edge about an impending ratings review by Moody's, with some economists fearful that a power crisis will cost the country its last investment-grade rating and lead to outflows of billions of dollars.

Moody's is indicatively scheduled to review the Baa3 rating and stable outlook it assigns South Africa later on Friday. The other two big rating agencies, S&P and Fitch, have already downgraded the sovereign to "junk".

This year South Africa has experienced its worst power cuts in several years, known locally as load-shedding, as cash-strapped utility Eskom struggles with capacity constraints. Eskom has not implemented rolling blackouts this week, but has warned the power system remains vulnerable.

"Our long-held view for this year has been that South Africa is likely to see its outlook on its Moody's long-term debt dual (local and foreign) currency credit ratings drop from stable to negative, but the actual rating remain unchanged at investment-grade," Investec economist Annabel Bishop said.

"However, Eskom's huge debt burden and negative impact from load-shedding on economic growth now risks an actual Moody's credit rating downgrade instead. Such a downgrade is estimated to likely see $8 billion-$10 billion flow out of South Africa."

The power crisis is a major challenge for President Cyril Ramaphosa a few weeks before an election at which he will try to reverse a decline in voter support for the governing African National Congress.

The South African Reserve Bank on Thursday cut its growth forecast for this year to 1.3 percent from 1.7 percent, saying this was partly due to the power cuts.

The rand currency is down more than one percent this week, with analysts saying Moody's decision will ultimately be the main driver of price action heading into next week.

A cut to junk status by Moody's would see South Africa removed from the benchmark World Government Bond Index (WGBI), and could trigger a sell-off by certain types of investors who are mandated only to buy high-grade debt. Many of these require two investment-grade ratings, however, meaning some may already have dumped South African assets.

The National Treasury said in the February 2019 budget that it would bail out Eskom with 69 billion rand ($4.70 billion) over three years.

Some analysts were hopeful Moody's would only lower its rating outlook to negative.

"It would seem that our fate is sealed, especially if we consider February's budget outcomes and Eskom's apparent unravelling," Rand Merchant Bank analyst Neiman Ramkhelawan-Bhana said in a note, adding Moody's review was "far more touch-and-go."

She added: "Yet there are indications that the agency is more forgiving of our shortcomings and might grant South Africa a reprieve, at least in the short term, to allow structural reforms to take hold."

($1 = 14.6705 rand)

(Reporting by Olivia Kumwenda-Mtambo; Editing by Catherine Evans)