Another Moody’s reprieve likely for a troubled South African economy

Moody’s Investors Service will probably give SA the benefit of the doubt once again before joining its peers, S&P Global Ratings and Fitch Ratings, in pulling the junk downgrade trigger.

This is not because SA has finally heeded Moody’s numerous calls to embrace urgent economic and fiscal reforms, but the rating agency’s historical practices might rescue the country from losing its remaining investment-grade rating.

On or before 1 November, Moody’s, which has SA’s debt at Baa3 (the lowest investment-grade level) with a stable outlook, is expected to publish its rating review.

The deteriorating economy, perpetual support of struggling state-owned entities – mainly Eskom – at the expense of ballooning government debt and ANC squabbles that are hurting much-needed policy certainty, make SA a prime candidate for a downgrade to sub-investment grade (or junk status). In its next rating review, Moody’s is expected to give President Cyril Ramaphosa another chance to get the house in order before pushing the country off the junk cliff.

A downgrade would blight Ramaphosa’s drive to raise new investments and showcase SA as an attractive investment destination. The cost of government borrowings would increase; the currency would weaken, causing inflation to spike and make imports more expensive; the country would be ejected from the Citi World Government Bond Index, forcing asset managers to sell billions of rand worth of SA bonds (but global managers with sub-investment grade mandates might pick up the bonds).

Lucie Villa, the lead SA analyst for Moody’s, indicated that South Africa might still have an investment-grade rating from the agency.

Speaking at a media briefing during Moody’s Sub-Saharan Africa Summit on Tuesday 10 September, Villa said there is a “low likelihood” of a change in SA’s rating – downwards or upwards – because the country has a stable outlook. Historically, Moody’s has revised the outlook of countries with a stable outlook to negative first before it launches a full junk downgrade. This might be the case with SA, with Moody’s likely to downgrade the outlook from stable to negative and keep the country’s debt rating at investment grade.

If this is its approach, Moody’s will probably continue to be isolated in credit rating circles because it’s the only major rating agency that has not downgraded SA to junk. S&P Global Ratings and Fitch Ratings took a dim view of SA’s deteriorating fiscal and economic performance as they both downgraded the country’s debt to junk in 2017.

No favouritism

Wayne McCurrie, a veteran portfolio manager at FNB Wealth and Investments, doesn’t believe that Moody’s favours SA. Instead, it has taken the view that the country is in a far better position than “proper junk countries” like Venezuela and Argentina.

“SA is a pretty girl among the ugly bunch. There are problems with the economy, but the lights, courts and banking system work for most of the time,” said McCurrie.

“Maybe technically SA is junk, but at least the currency is not falling by 40% most of the time, the economy has not collapsed even though there is high unemployment and inflation is not at 500%. We are still standing.”

Chief economist at the Institute of Race Relations, Ian Cruickshanks, supported McCurrie’s views, adding that it’s not about favouritism but Moody’s rating reflects its criteria, which factors in, among others, implementation of structural reforms and level of risk in government debt.

Sober warnings

Moody’s gave a stark warning about SA’s economic growth outlook. It slashed the 2019 outlook to 0.7% for the second time this year – from its forecast of 1% in June, which was also revised down from earlier expectations of 1.3%. The latest forecast is in line with the SA Reserve Bank expectation of 0.6%.

Moody’s cited policy uncertainty, slow implementation of structural reforms and a worsening global economy for the economic outlook downgrade. Moody’s expects economic growth to pick up in 2020, with growth rebounding to 1.5%.

Villa warned that government’s economic reforms are slow and there isn’t a “realistic path” on implementing reforms, especially at Eskom, which depends on taxpayer-funded bailouts because it cannot generate enough revenue to service its R440-billion debt and more than R50-billion in annual interest payments.

Eskom requires additional government support of R128-billion over the next three years. Without a strategic plan to turn around the power utility and commitment to cutting government spending, Moody’s expects the debt to GDP ratio to rise to 70% in the next two to three years. Meanwhile, the government expects it to increase further to 68% in 2021/2022.

On the plus side, Moody’s is positive about rebuilding the credibility of institutions of accountability, including the SA Revenue Service and National Prosecuting Authority. BM