Moody’s puts SA in line for another downgrade

Late Tuesday afternoon, saw the announcement from Moody’s Investors Services that it had placed South Africa on review for a possible downgrade. This would see their rating fall in line with that of Fitch and Standard & Poor’s, given to the country late last year.

The decision by Moody’s was reportedly prompted by the increasing rise in risk to the country’s medium-term economic prospects, as well as its overall fiscal strength. This is despite Minister of Finance Pravin Gordhan’s 2016/2017 budget that is set on enforcing tighter fiscal rein.

“Moody’s will be visiting South Africa for its annual review during the period of 16 to 18 March 2016. This review visit will primarily serve to either affirm the current ratings or downgrade them. Moody’s currently rates South Africa two notches above sub-investment grade for foreign currency debt,” stated National Treasury.

During the visit, the ratings agency will seek to analyse the stances of various stakeholders in government, civil society and labour, as well as in the private sector on a number of expanses. These include whether the decline in South Africa’s economic outlook will be reversed in the medium term, whether satisfactory progress can be made to stabilise the economy and if policy is likely to lead to reversing the economic down spiral.

Treasury’s response

Treasury highlighted that the below points would be covered in their meetings with the agency:

- Our collaborative actions aimed at accelerating inclusive growth,

- Measures adopted in the 2016 Budget to accelerate fiscal consolidation and to give effect to the National Development Plan,

- The steps taken to reinforce stable industrial relations,

- The accelerated implementation of our R870 billion infrastructure investment programme,

-  The progress made in resolving the energy constraint including through renewables IPPs (independent power producers) and the extension of the same approach to coal and gas,

- The initiatives we are taking to implement the recommendations of the Presidential

Review Commission on SOCs (state owned companies) aimed at strengthening their governance and financial oversight.

The government response further noted Moody’s decision by saying that it must be viewed within the context of weak global growth and the backdrop of a trying climate for emerging markets and heightened volatility.

“As a resilient nation we are working together: civil society, labour, business and government to demonstrate our commitment to translate our plans into concrete actions,” concluded Treasury.

Finance world reaction

When asked what this would mean for the economy of the country, Craig Pheiffer, head of private client asset management for wealth and investment management at Absa, answered: “A sovereign credit rating reflects a country’s creditworthiness and the higher the rating, the lower the expected chance of default on the country’s debt. Higher risk debt attracts higher costs (higher interest rates) and so it is in a country’s best interests to have the highest rating possible as this lowers the interest rate that it will have to pay when it borrows money from investors.

“Lower ratings mean higher costs that the government will have to pay to service its debt and ultimately this is money that government could spend better elsewhere and so has a direct impact on the populace. This year National Treasury has budgeted R148 billion to debt servicing costs and this can be compared to the R168 billion to be spent on health. Clearly whatever we can do to reduce debt levels and our debt servicing costs will benefit the country and ultimately households and consumers.”

Pheiffer further explained that in order to avert the downgrade the following needed to be kept in mind: “Ratings agencies look at a number of factors when assigning a rating, from political and macroeconomic factors to infrastructural and socioeconomic factors. The biggest need at the moment is to show the ratings agencies how we can grow our economy.

“With GDP growth expected to be less than one percent this year, we have to show the agencies what actions we are putting into place to drive our potential growth rates sustainably higher. Higher growth rates mean greater tax revenues for government and a greater ability to balance the budget, reduce debt and uplift the broader society and create more widespread prosperity.”

First National Bank (FNB), through economist Mamello Matikinca, also commented: “Moody’s credit rating for South Africa currently stands at Baa2 with a negative outlook, it is currently a notch above Fitch and S&P who have both placed the sovereign a notch above sub-investment grade (“Junk”). 

“As such a downgrade by Moody’s would bring the agency in line with the other two agencies. Be that as it may, we believe the national budget delivered by the finance minister last month should have shifted a downgrade to sub-investment grade by at least one agency to December from June.”

He also expressed that the proposed fiscal consolidation targets were ambitious and further that the effort was not sufficient to support a ‘conclusion that a downgrade was unlikely in December.’

“The main reason is that while we are showing renewed commitment, we are probably too late to implement and display evidence of growth enhancing structural reforms in time to save an investment grade rating from all three major agencies. However, based on the Budget we have taken a step in the right direction,” added Matikinca.