May 12, 2015 / 1:13 PM / 5 years ago

South Africa could be downgraded if govt fails stabilise debt: Moody's

A Moody's sign on the 7 World Trade Center tower is photographed in New York August 2, 2011. REUTERS/Mike Segar

JOHANNESBURG (Reuters) - South Africa’s credit rating could be downgraded if the government’s commitment to fiscal consolidation and stabilising its debt falters, ratings agency Moody’s said in a credit opinion.

Rising consumer inflation and a probable increase in U.S. policy rates could lead the South African Reserve Bank to hike domestic rates by year-end, despite the struggling economy, Moody’s said in the research note sent to Reuters on Tuesday.

Moody’s downgraded South Africa to Baa2 from Baa1 in November, citing poor prospects for medium-term growth and rising public debt in the continent’s most advanced but ailing economy.

Baa2 is two notches from speculative or “junk” grade, and some analysts are expecting a downgrade to come soon as Moody’s looks to align its rating with the two other ratings houses.

Standard and Poor’s lowered South Africa’s credit status to one place above junk status last June. Fitch rates South Africa two places above the speculative grade but with a negative outlook.

“We have 18 months to 2 years to sort out our problems,” warned Michael Power, a strategist for Investec Asset Management, at a ratings conference in Johannesburg.

Powers said South Africa’s wage bill was too high and was hampering the economy’s ability to create jobs while also damaging its fiscal metrics.

Nearly 1,3 million of South Africa’s public servants will vote this week on whether to accept a final wage hike offer of 7 percent from the government, or else embark on a nationwide strike that could dent the economy.

South Africa is battling to keep a yawning budget deficit in check by cutting spending, while also facing pressure from an ongoing power supply shortage that could see already anemic growth of around 2 percent in 2015 halved.

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