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Moody's says South Africa credit rating well placed

LONDON, Sept 27 (Reuters) - South Africa's credit rating is well placed at the lowest investment grade, but rising foreign ownership of the government's local-currency bonds is a risk, a senior analyst at Moody's ratings agency said.

Two of the three large international ratings agencies - S&P Global and Fitch - downgraded South Africa's foreign-currency rating to speculative grade, or "junk" status, this year after the economy slowed and an abrupt Cabinet reshuffle in March.

Moody's downgraded South Africa to "Baa3", one notch above junk, in June and has the continent's most industrialised economy on a negative outlook.

The ratings downgrades have put pressure on South African asset prices and could increase its borrowing costs.

"We think currently South Africa is well placed at Baa3 with a negative outlook. We had a rating action fairly recently in June," Zuzana Brixiova, a Moody's vice president, told Reuters at an investor conference in London.

However, she said that since the June downgrade she had observed a larger-than-expected shortfall in South African government revenues and an increase in foreign financing of government borrowing in rand to around 40 percent.

"To some extent the risk of a 'sudden stop' has increased," she said, referring to the risk that an abrupt change in investor sentiment could result in a sharp reduction in capital flows into South Africa.

Among other concerns, Brixiova cited weak economic growth in South Africa and pressure on institutions, which she said "were being constantly tested".

She said that whoever the ruling ANC party chooses as its next leader at a major conference in December, Moody's "would wait and follow what this really means for the policy direction".

South Africa was earlier dropped from one of the widely used global bond indices, and it risks being excluded from a larger index run by U.S. bank Citi if both Moody's and S&P cut the country's local-currency rating to junk.

Both agencies have South African local debt at the lowest investment grade, and Brixiova said Moody's was likely to keep one unified rating for South African foreign and local debt.

Looking at sub-Saharan Africa as a whole, Brixiova said it was important for countries to "rebuild their fiscal space" in the wake of the slump in commodity prices in recent years. (Reporting by Alexander Winning and Karin Strohecker; Editing by Toby Chopra)