Moody’s on Friday evening cut its sovereign credit rating for SA to Baa3 from Baa2‚ one notch above junk.

As expected‚ Moody’s held its outlook on SA as negative‚ raising the fear of another downgrade in December.

Moody’s said the key drivers for the downgrade were the “weakening of SA’s institutional framework‚ reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms”.

It also highlighted “the continued erosion of fiscal strength due to rising public debt and contingent liabilities”.

In the nomenclature used by S& P Global Ratings and Fitch‚ Baa3 equates to BBB-‚ placing the credit rating of South African government bonds in the “lower medium grade” range.

Moody’s remains more positive about SA than its two main competitors who both cut their sovereign ratings from BBB- to BB+ in April shortly after President Jacob Zuma fired finance minister Pravin Gordhan and his deputy Mcebisi Jonas.

Moody’s was originally scheduled to issue its ratings decision on April 7‚ but then on April 3 said it would delay its announcement to get more clarity on the effects of Zuma’s Cabinet reshuffle. Moody’s said at the time it was placing SA on review for a downgrade.

In Moody’s rationale on Friday it said: “... recent events‚ particularly but not exclusively the abrupt March Cabinet reshuffle‚ illustrate a gradual erosion of institutional strength. The institutional framework has become less transparent‚ effective and predictable‚ and policymakers’ commitment to previously-articulated reform objectives is less certain.”

S& P differs from Moody’s and Fitch in that it rates SA’s rand-denominated debt — the bulk of government bonds — a notch higher than foreign-currency denominated debt.

S& P’s BBB- credit rating for rand-denominated debt along with Moody’s Baa3 sovereign credit rating means the bulk of SA’s government bonds still escape the “two out of three” rule many large fund managers use to classify bonds as junk.

Moody’s SA sovereign rating report came a week after S& P affirmed its April 3 downgrade on its scheduled review date of June 2. S& P held its outlook on SA as negative‚ meaning the country risks a further credit downgrade in December.

A concern raised in all three credit rating agencies reports is SA’s lacklustre economic growth.

Moody’s said on Friday the negative outlook was retained due to the continued downside risks for growth and fiscal consolidation associated with the political outlook.

“Over the medium-term‚ economic and fiscal strength will remain sensitive to investor confidence and hence uncertainty surrounding political developments‚ including prospects for structural reforms intended to raise potential growth and flexibility in fiscal expenditures.”

Hopes of better rainfall after 2016’s drought helping SA escape a second quarter of economic contraction were dashed on Tuesday when Statistics SA reported gross domestic product (GDP) fell 0.7% in three months to end-March.

Although agriculture’s contribution to GDP grew 0.4% and mining’s contribution grew 0.9%‚ all other nine components of GDP shrank.

Most severe was trade which contracted 0.8%‚ followed by manufacturing which contracted 0.5%.

Within a few minutes of the release on Friday the rand had fallen by about 6c to the dollar to R12.92 from R12.86 previously.