SOVEREIGN AND SUPRANATIONAL

CREDIT OPINION
15 August 2017
Government of South Africa Baa3
Negative
Update Regular update
Summary
The South African governments credit profile is supported by the economys relative size
and diversification, sound macroeconomic policy and fiscal management, and deep financial
markets. Credit constraints include persistently low growth, as business confidence and
investment languish, and rising policy uncertainty.
Contacts
Exhibit 1
Zuzana Brixiova 44-20-7772-1628
South Africa's credit profile is determined by four factors
VP-Senior Analyst
zuzana.brixiova@moodys.com Economic Institutional Fiscal Susceptibility
strength strength strength to event risk
David Kamran 212-553-2109
Associate Analyst Moderate (+) Moderate (+) Moderate (+) Moderate (-)
david.kamran@moodys.com
Aurelien Mali 971-4-237-9537 Economic resiliency
VP-Sr Credit Officer Moderate (+)
aurelien.mali@moodys.com
Matt Robinson 44-20-7772-5635 Government financial strength
Associate Managing
Moderate (+)
Director
matt.robinson@moodys.com
Government bond rating range
Yves Lemay 44-20-7772-5512
MD-Sovereign Risk Baa2 - Ba1
yves.lemay@moodys.com
Source: Moody's Investors Service
Alastair Wilson 44-20-7772-1372
MD-Global Sovereign
Risk Credit strengths
alastair.wilson@moodys.com
deep and well developed domestic financial markets and well capitalized banking sector;
CLIENT SERVICES
sound macroeconomic framework; and
Americas 1-212-553-1653
Asia Pacific 852-3551-3077 low share of foreign currency debt in total public debt.
Japan 81-3-5408-4100
Credit challenges
EMEA 44-20-7772-5454
gradual erosion of the institutional framework;

low growth and high unemployment reflecting persistent structural bottlenecks; and

accumulation of public debt and government contingent liabilities

 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Rating outlook
The negative outlook reflects Moodys view that the risks to growth and fiscal strength arising from the political outlook are tilted
to the downside. It is unlikely that a political consensus will emerge which supports investment in the economy and reinvigorates
the reform effort sufficiently quickly to reverse the expected negative impact on growth and on the governments balance sheet. The
opposite scenario, of heightened political dysfunction, continued gradual institutional weakening and diminished clarity over policy
objectives, has a higher likelihood.

Factors that Could Lead to Stabilization of the Rating at the Current Level
Moody's could change the rating outlook from negative to stable if the government were to implement policies and reforms that
indicated the continued independence and strength of South Africas policy institutions, and which enhanced medium-term growth
and achieved the planned stabilization in the governments debt burden. A decline in the value of guarantees to state-owned
enterprises would also be credit positive.

Factors that could lead to a downgrade

The future trajectory of the rating will depend on the government's success in safeguarding South Africas institutional, economic and
fiscal strength. Indications that the strength and independence of the countrys institutions have diminished to a greater extent than
in Moodys baseline scenario, or that the emerging policy framework has become even less predictable or has shifted in a way likely
to undermine economic or fiscal strength, could lead to a further downgrade. Further delays in growth enhancing reforms would be
suggestive of such a shift. Downward pressure could also develop if liquidity pressures begin to reemerge at state-owned enterprises
that would elicit pronounced government intervention, be it through the activation of guarantees or other measures.

Key indicators
Exhibit 2

South Africa 2011 2012 2013 2014 2015 2016 2017F 2018F

Real GDP (% change) 3.3 2.2 2.5 1.7 1.3 0.3 0.5 1.2
Inflation (CPI, % change, Dec/Dec) 6.4 5.7 5.3 5.3 5.2 7.1 6.1 5.8
Gen. gov. financial balance/GDP (%)[1] -4.4 -3.8 -3.4 -3.1 -3.1 -3.7 -3.6 -3.5
Gen. gov. primary balance/GDP (%)[1] -1.7 -1.0 -0.4 0.1 0.3 -0.2 0.0 0.2
Gen. gov. debt/GDP (%)[1] 40.7 43.3 45.9 48.6 50.5 51.3 52.4 53.0
Gen. gov. debt/revenues (%)[1] 121.9 129.0 133.0 135.6 137.1 141.5 143.2 144.2
Gen. gov. interest payment/revenues (%)[1] 8.1 8.6 8.8 9.0 9.2 9.7 9.8 10.1
Current account balance/GDP (%) -2.2 -5.1 -5.9 -5.3 -4.4 -3.2 -3.7 -3.8
External debt/CA receipts (%)[2] 88.4 113.2 112.1 122.0 117.1 155.6 150.1 148.7
External vulnerability indicator (EVI) [3][4] 69.3 64.8 88.8 72.5 88.4 89.1 84.2 89.1
[1] Fiscal years ending March 31, e.g. 2014 refers to fiscal year 2014/15
[2] Current Account Receipts
[3] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves
[4] Excludes total nonresident deposits over one year
Source: Moody's Investors Service

Detailed credit considerations

Our assessment of South Africa's Economic Strength as 'moderate (+)' balances the economy's relative size and diversification with
persistently slow growth, which has contributed to the country being kept in the middle-income trap. Slow growth has also constrained
job creation and has been accompanied by high unemployment as well as weakening debt metrics. Moreover, in contrast to most other
emerging markets, South Africa's gap with income per capita levels of major advanced economies (G7) has been widening.

Although small in comparison to the other BRICS (Brazil, Russia, India, China, South Africa), South Africas economy is among the three
largest in Africa, alongside Nigeria and Egypt. The slowdown in growth and productivity posted since 2011 is in part due to external

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

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 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

conditions, especially reduced global potential growth and trade. However, key constraints to growth are domestic, including political
tensions and policy uncertainty. Structural challenges, such as the limited flexibility in labour and product markets, the electricity gap,
the lack of competition in network sectors and weak governance of state-owned enterprises hamper growth.

High unemployment, inequality and poverty remain key challenges. Despite progress in lifting millions out of absolute poverty, the
development of the black middle class has been limited. High and long-term unemployment, especially among youth, reflects societal
divides and exclusion of this group from both resources and opportunities. High inequality, HIV rates as well as child and maternal
mortality rates weaken the country's productive base.

We assess South Africa's Institutional Strength also as 'moderate (+)' with adherence to Constitution accountability and the rule
of law as key pillars of South Africas institutional strength. Macroeconomic policy formation in South Africa is coherent and rests on
sound framework and data. While the South African Reserve Bank (SARB) has experienced increased pressure on its independence and
mandate, SARB's policymaking has so far been sound and effective.

Our current assessment of Institutional Strength as 'moderate (+)' is below the indicative score of 'high (-)'. Recent events, particularly
but not exclusively the abrupt March Cabinet reshuffle as well as attempts by the Public Protector to alter SARB's mandate, illustrate a
gradual erosion of institutional strength. Over time, the institutional framework has become less transparent, effective and predictable,
and policymakers commitment to previously articulated reform objectives is less certain.

We view South Africa's Fiscal Strength as 'moderate (+)'. The government has a track record of sound fiscal management, especially
on the spending side. The National Treasury has consistently met expenditure ceilings which on balance have helped stabilize
spending net of interest and bring about a reduction in primary fiscal deficits. However, collection of tax revenues is constrained by
the weak economy and falling tax buoyancy. Low growth and financially challenging state-owned enterprises increase the risk of fiscal
deterioration. Public debt and total contingent liabilities have doubled in terms of GDP since 2008/09, exceeding 50% and 20% of
GDP at the end of 2016, respectively. Cost of borrowing has risen, with South Africa's interest payments relative to revenues now
marginally exceeding the median of Baa-rated peers.

Our sovereign bond methodology covers also susceptibility to event risks, that is risks associated with political developments, the
banking system, debt market access and external vulnerabilities. A country's overall susceptibility to risks is set at the maximum level
that any of these sub-factors reach.

We assess Susceptibility to Event Risk at 'moderate (-)', driven by domestic political risk. Our assessment of rising domestic political
risk reflects protracted political infighting that generates policy uncertainty, impedes structural reforms, and discourages investment.

Lesser vulnerabilities come from persistent current account deficits, which are funded heavily by capital inflows. While high non-FDI
inflows pose a risk, the economy has proved resilient, with a flexible exchange rate and low foreign currency debt serving as buffers.
With almost 90% of the government's debt being rand-denominated and raised in the local capital market, the exchange rate risk to
the debt portfolio is low. Accordingly, we assess external vulnerability as 'low'.

Our government liquidity risk (GLR) score of 'low' differs from the indicative 'very low'. With about one-third of public debt being held
by nonresidents, risk of sudden stops or outflows of portfolio capital is material should investor confidence abruptly fall. At estimated
7.2% of GDP for 2017, the government's borrowing needs are comparable to similarly-rated peers though the government expects to
reduce its borrowing needs with primary surpluses in the 2018/19 fiscal year.

Our assessment of the banking sector risk as 'low' differs from the scorecard's indicative score as 'low (+)'. The adjustment reflects high
bank capitalization and modern macro-prudential framework. The tightening of credit standards that began in 2015 has helped banks
reduce their exposure to the household sector, which is the most vulnerable to interest rate shocks, and redirect it towards corporates
that have better debt-servicing capacity.

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Recent developments
Abrupt cabinet reshuffle has further reduced business confidence

On 30 March, the President of South Africa announced wide-ranging changes to the countrys government, changing top leadership
in 10 ministries, including in key portfolios such as finance and energy. The timing and scope of the reshuffle raised questions over
the motive and the prospects for ongoing reforms, the underlying strength of South Africas institutional framework, and the fragile
recovery in the countrys economic and fiscal position. Following the reshuffle, cooperation between government, labour, and business
has been weakened and trust eroded. South Africas Bureau of Economic Research Business Confidence Index has been below 50 since
the final quarter of 2014, reflecting the continued lack of business confidence. The Business Confidence Index, for which 50 is neutral
and below 50 indicates a lack a confidence, fell 11 points in the second quarter of this year to 29 from 40 in the first quarter, with a
decline reported across all sectors surveyed.

Political tensions within the African National Congress are rising in the run up to leadership elections

On 8 August, the South African National Assembly's vote on a motion of no confidence in the President fell short of the 201 votes
necessary to remove President Zuma. This marked the seventh motion of no confidence since the President took office in 2009, and
the first time when the vote was carried out with a secret ballot. The results reflect the rising political tensions within the ruling party
in the run up to the leadership conference of the African National Congress (ANC) in December 2017. The credit impact of the result
is subdued as the long-term weaknesses in growth, financial situation of state-owned enterprises, and business confidence, as well as
continued uncertainties surrounding policy making, remain unchanged. Investment is likely to remain low until a more stable political
situation and policy environment emerge.

Growth is underwhelming and unemployment rate the highest since the global financial crisis

A modest emergence from recession is expected in growth results for the second quarter of 2017, after the South African economy
contracted 0.7% q/q in the first quarter of 2017 following a 0.3% q/q contraction in the fourth quarter of 2016. Even though the
mining sector has been exhibiting a continued cyclical recovery, taking into account heightened policy uncertainty and the lack of
structural reforms we have reduced our forecast of real GDP growth to 0.5% in 2017 and 1.2% in 2018. Unemployment, which has
recently reached the highest level since the global financial crisis and shows wide differences across ethnic groups, is also projected to
remain elevated (exhibits 3 and 4).

Concurrently, high unemployment and inequality continue to depress private consumption and hence domestic demand. South Africa's
low labour utilization is a key factor behind the country's low wealth levels (GDP per capita) relative to advanced economies and some
other emerging markets. Against this background, the working age population has limited incentive to invest in skills demanded in the
market. In turn, employment is focused in low productivity jobs and firms, where the lack of investment in physical and human capital
erodes the capital stock and limits innovation.
Exhibit 3 Exhibit 4
Unemployment has ethnic dimension... ...and so does labour force participation
Unemployment rate (% of labour force) Labour force participation (% of working age population)
Total Total Black/African Coloured
Black/African Total Black/African Coloured
35 Indian/Asian White Indian/Asian White
35.0 75.0
30
30.0
70.0
25
25.0
20 65.0
20.0

15
15.0
60.0
10
10.0
55.0
Mar-11

Jul-10 Mar-12

Jul-11 Mar-13

Jul-12 Mar-14

Jul-13 Mar-15

Jul-14 Mar-16

Jul-15 Mar-17
Jul-11
Mar-10 Nov-11

Jul-12
Mar-11 Nov-12

Jul-13
Mar-12 Nov-13

Jul-14
Mar-13 Nov-14

Jul-15
Mar-14 Nov-15

Jul-16
Mar-15 Nov-16

5
5.0

0.0
0 50.0
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17
Jul-10
Nov-10

Jul-11
Nov-11

Nov-12
Jul-12

Jul-13
Nov-13

Jul-14
Nov-14

Jul-15
Nov-15

Jul-16
Nov-16

Mar-16

Mar-17
Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Jul-16
Nov-16

Source: Statistics South Africa Source: Statistics South Africa

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Revised mining charter draws dispute within the mining sector, while long-awaited FICA bill approved

South Africas Department of Mineral Resources published a new draft of the mining charter on June 15th, outlining measures aimed
at supporting socio-economic empowerment in the sector. The new charter elicited a sharp response from the mining sector, and
ultimately led to the new charter being put on hold, as the Chamber of Mines moved to interdict the charter in court. Continued
uncertainty regarding key legal and regulatory underpinning of South Africas mining sector will further delay new investment in the
sector and will prevent it to benefit fully from the current cyclical upturn.

In April 2017, President Zuma signed off on the Financial Intelligence Centre Amendment (FICA) bill, which aims to combat illicit
financial activities in accordance with international standards. The bill will support the elimination of financial crimes such as tax
evasion and money laundering, among others. The President originally rejected the approval of the bill last year due to concerns that
some provisions may breach the Constitution.

SARB cuts rates as inflationary expectations fall and growth remains below potential

In July, SARB's Monetary Policy Committee cut its policy rate by 25 bps to 6.75%. The cut, which was SARB's first in 5 years, constituted
an important reversal in SARB's monetary policy stance. While the rate cut coincided with political pressures on the SARB's mandate
and independence, it has been justified by economic circumstances. The decision occurred in the context of better than expected
inflation data, well-anchored inflationary expectations, and low growth. It should support aggregate demand, near-term growth as well
as fiscal consolidation. However, without decisive structural reforms longer-term potential growth and the fiscal outlook will remain
subdued and continue to be a source of credit pressure.

Recent bailout of South African Airways points to ongoing financial challenges of state-owned enterprises (SOEs)

In early July, the National Treasury provided 2.3 billion rand to South African Airways (SAA) for it to be able to repay a loan to Standard
Chartered Bank. Other SAA's loans amounting to about 6.7 billion rand also matured but the airline managed to get these rolled over
through negotiations. While the amount of the bailout was small (less than 0.1% of GDP), it happened in an environment of very weak
business confidence. While conditions aimed at improving SAA's performance were not attached to the bail out, the National Treasury
has recently appointed a new CEO with a view to strengthen SAA's governance and financial situation. The Treasury has also started
engaging other government departments on the Private Sector Participation framework as a part of broader SOE reforms.

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Rating methodology and scorecard factors

Rating factors grid - South Africa
Sub-factor Indicative factor
Rating factors Indicator Final factor score
weighting score
Factor 1: Economic strength M+ M+
Growth Dynamics 50%
Average real GDP growth (2012-2021F) 1.6
Volatility in real GDP growth (standard deviation, 2007-2016) 1.9
WEF Global Competitiveness index (2016) 4.5
Scale of the economy 25%
Nominal GDP (US$ billion, 2016) 294.3
National income 25%
GDP per capita (PPP, US$, 2016) 12,679
Automatic adjustments [-3; 0] Scores applied
Credit boom 0
Factor 2: Institutional strength H- M+
Institutional framework and effectiveness 75%
Worldwide Government Effectiveness index (2015) 0.3
Worldwide Rule of Law index (2015) 0.1
Worldwide Control of Corruption index (2015) 0.0
Policy credibility and effectiveness 25%
Inflation level (%, 2012-2021F) 5.7
Inflation volatility (standard deviation, 2007-2016) 1.9
Automatic adjustments [-3; 0] Scores applied
Track record of default 0
Economic Resiliency (F1xF2) H- M+
Factor 3: Fiscal strength M+ M+
Debt burden 50%
General government debt/GDP (2016) 51.3
General government debt/revenue (2016) 141.5
Debt affordability 50%
General government interest payments/revenue (2016) 9.7
General government interest payments/GDP (2016) 3.5
Automatic adjustments [-6; +4] Scores applied
Debt trend (2013-2018F) 0
Foreign currency debt/general government debt (2016) 0
Other non-financial public sector debt/GDP (2016) -1
Public sector assets/general government debt (2016) 0
Government financial strength (F1xF2xF3) H- M+
Factor 4: Susceptibility to event risk Max. function M- M-
Political risk M- M-
Worldwide voice & accountability index (2015) 0.6
Government liquidity risk VL+ L
Gross borrowing requirements/GDP 7.2
Non-resident share of general government debt (%) 29.9
Market-Implied Ratings Ba1
Banking sector risk L+ L
Average baseline credit assessment (BCA) baa3
Total domestic bank assets/GDP 113
Banking system loan-to-deposit ratio 95
External vulnerability risk L L
(Current account balance + FDI Inflows)/GDP -2.5
External vulnerability indicator (EVI) 89.1
Net international investment position/GDP 3.8
Government bond rating range (F1xF2xF3xF4) A3 - Baa2 Baa2 - Ba1
Assigned foreign currency government bond rating Baa3
Note: While information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments
that may differ from the ones implied by the rating range. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons
and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the indicative rating range. For more
information please see our Sovereign Bond Rating Methodology.
Footnotes: (1) Indicative factor score: rating sub-factors combine with the automatic adjustments to produce an Indicative factor score for every rating factor, as
detailed in Moodys Sovereign Bond Methodology. (2) Final factor score: where additional analytical considerations exist, Indicative factor scores are augmented to
produce a Final factor score. Guidance on additional factors typically considered can be found in Moodys Sovereign Bond Methodology; details on country-specific
considerations are provided in Moodys research. (3) Rating range: Factors 1: Economic strength, and Factor 2: Institutional strength, combine with equal weight
into a construct we designate as Economic Resiliency or ER. An aggregation function then combines ER and Factor 3: Fiscal strength (FS), following a non-linear
pattern where FS has higher weight for countries with moderate ER and lower weight for countries with high or low ER. As a final step, Factor 4, a countrys
susceptibility to event risk, is a constraint which can only lower the preliminary government financial strength rating range as given by combining the first three
factors. (4) 15 Ranking categories: VH+, VH, VH-, H+, H, H-, M+, M, M-, L+, L, L-, VL+, VL, VL- (5) Indicator value: if not explicitly stated otherwise, the indicator
value corresponds to the latest data available.

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Moody's related publications

Issuer In-Depth: Government of South Africa : Policy rate cut supports near-term growth recovery, but structural constraints still
impede medium-term outlook, 28 Jul 2017

Issuer In-Depth: Government of South Africa Baa3 Negative: Annual Credit Analysis, 14 Jul 2017

Issuer Comment: Steep Decline in South Africa's Business Confidence Is a Setback to Growth Recovery, 19 Jun 2017

Country Statistics: South Africa, Government of, 13 Jun 2017

Issuer In-Depth: Government of South Africa : FAQ on Strength of Institutions, Growth Prospects and Debt Trajectory, 09 Jun
2017

Rating Action: Moody's downgrades South Africa's rating to Baa3 and assigns negative outlook, 09 Jun 2017

Rating Methodology: Sovereign Bond Ratings, 22 December 2016

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

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8 15 August 2017 Government of South Africa Baa3 Negative: Regular update

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9 15 August 2017 Government of South Africa Baa3 Negative: Regular update