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Moody's, the ratings agency, released a research report on the South African government on Tuesday, saying that state entities are a risk to the country's credit rating.

Currently, the Moody's rating has SA sitting on Baa3 with a stable outlook, just one rung above junk status. The report outlines weak state-owned enterprises (SOEs), "job and growth-limiting" structural bottlenecks, as well as "social and political divisions" that lead to policy uncertainty as some of the challenges facing the country.

Last week Friday, Moody's was scheduled to issue its ratings action but postponed its announcement – likely until after next week's mid-term budget by SAs finance minister, Tito Mboweni – leading to the rand remaining resilient and strengthening on Monday.

Moody's report indicated that, unless "prospects to revive growth falter, or if the government cannot stabilise its debt burden and contingent liabilities from SOEs," then SA's ratings would be downgraded.

"Any crystallisation of contingent liability from SOEs that would raise the government debt burden and place it on a higher trajectory would likely have negative rating implications," the report read.

It continued, saying, "Credit constraints include elevated government debt and contingent liabilities risks from state-owned enterprises, which limit the capacity of the government to absorb potential shocks or use fiscal stimuli, as well as persistently low growth."

It wasn't all doom-and-gloom though, with Moody's explaining that credit strengths including SA's "core institutions" such as the judiciary, the SA Reserve Bank, a well-capitalised banking sector and "relatively deep" financial markets are a sign of strength, along with its low share of foreign currency debt.

They go on to say that an upgrade would be possible if structural reforms to raise growth is implemented to stabilise and reduce the government's debt. They also commented that "reforms at SOEs to reduce contingent liabilities" would be beneficial.

They suggested that issues such as limited flexibility in labour and product markets, skills shortages, regulatory uncertainty in the mining sector, the lack of competition in network sectors and the weak governance of SOEs, all lead to "structural challenges to growth" and should be focussed on.

Certain policy challenges are a cause of slower than expected economic growth, with Moody's projecting growth of 0.5% for 2018 and 1.3% in 2019.

Moody's go on to say they believe that the government can bring down the GDP deficit from 4.3% to 3.5% by 2020/21, where debt would be at 56% of GDP, if they take action. "Our fiscal deficit forecast already assumes a fair amount of adjustments from the government, the details of which will be published in the government medium-term (mini-budget) budget policy statement, on 24 October 2018," the report said.

Regarding the appointment of Tito Mboweni as finance minister, Moody's said it could lead to changes in policy implementation.

In response, Mboweni was quoted as saying, "We would not expect the broad direction of policy to be dependent on individuals, in particular given that institutions in South Africa have proven resilient to challenges in recent years."

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