Moody’s downgrade next year is nearly inevitable – experts

To sustain Moody’s current rating, government would need to develop a credible fiscal strategy to contain the rise in debt.


Experts have doubted South Africa can do much to stop the economy’s downward spiral to avoid another credit rating downgrade next year.

This after the announcement by ratings agency Moody’s that it had changed its outlook on the government’s ratings from stable to negative and affirmed the Baa3 long-term foreign-currency and local-currency issuer ratings.

According to Peter Attard Montalto, the head of Capital Markets Research at Intellidex, a downgrade by March next year was nearly inevitable.

What steps to take in order to lead Moodys to a resolution to a stable outlook before then, was of key importance to thwarting this trajectory. For Montalto, fiscal consolidation would be key to this.

“Resolution to a cut however would occur clearly if nothing happens by February. But what about if there is a small amount of consolidation at the margin as is our view?” said Montalto.

“For now, before we have further clarity on exactly where this resolution line is for this, we think it will be a 50:50 call on a downgrade after the budget  in February – assuming the calendar date is in, say, March.

“Finding this line, along with more clarity from Moody’s will lead to a more definite view. Put simply, we think a downgrade is very much possible now in March.”

For economist Peter Bauer, the picture was far bleaker. According to him, South Africa’s economy was being hit from all sides with international as well as domestic factors, which were impossible to turn around by February next year.

According to Moody’s, the decision to change the outlook to negative from stable stemmed from the risk that the government would not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures.

Government’s challenges were evident in the continued deterioration of South Africa’s trend in growth and public debt burden, despite ongoing policy responses.

According to Bauer, the 70% debt to GDP ratio and the diminished economic growth, which stood at around 0,9%, posed an impossible situation to turn around by next year.

“I think they will downgrade us,’ said Bauer. “There have been times before when they have given us another chance and they say South Africa must do something, but I don’t see that happening this time around.

“They are a lot more serious about it and the reason for that is there are also issues affecting us internationally, especially the global economic slowdown which is going to affect us very much.

“In America there is slowdown and business confidence is low. Even the Brexit event has created a certain amount of uncertainty globally. The trade war between America and China as well has influenced economies on a global scale.”

But Bauer pointed out the few things counting in South Africa’s favour, including the sound state of the South African Reserve Bank’s monetary policy, which he credited to former governor of the bank and current finance minister Tito Mboweni.

“What [Moody’s] did mention as a positive is that the reserve bank has a really sound monetary policy and we have a very good and sound financial institution structure, which was in the report.

“The credit there really goes to Tito Mboweni when he was the governor of the reserve bank, because 90% of that is owed to him. He really structured the monetary policy framework for the reserve bank very well.”

For Moodys, the high unemployment, income inequality and the social and political challenges they imply for policymakers may have been long-standing features in South Africa, but the obstacles they posed to the government’s plans to raise potential growth and contain fiscal deficits were proving more severe than expected a year ago.

The agency listed acute financial stress for state-owned enterprises (SOEs), in particular Eskom Holdings SOC Limited (Eskom, B2 negative), continued to require sizeable ongoing support from the government.

Crucial to sustaining Moody’s current rating of its government would be South Africa’s ability to develop a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement.

– simnikiweh@citizen.co.za

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