SA looks set to dodge Moody's ratings bullet

SA looks set to dodge Moody's ratings bullet

JOHANNESBURG – Moody’s on Tuesday gave South Africa a reprieve, saying it was unlikely to downgrade the country’s sovereign debt, but cut the country’s growth forecast to 0.7 percent from 1 percent in June.

Moody’s, the only international ratings agency that still has South Africa’s credit rating above junk, said there was a low likelihood of a downgrade, due to the country’s stable outlook.

Moody’s has maintained South Africa’s credit rating just one notch above investment grade with a stable outlook.

Moody’s vice-president and lead analyst for South Africa, Lucie Villa, said the rating agency was expecting that government debt will stabilise.

“South Africa has a greater degree of predictability compared to its peers, but questions around government’s capacity and implementation will hinder progress. There is room to be more efficient,” she said.

“South Africa has a deep and stable financial sector which supports the finance ability of debt. South Africa has low levels of foreign currency-denominated debt, a longer average maturity of government debt, and a healthier positive net international investment position relative to its peers.”

Moody’s was expected to announce its review in November.

Villa said South Africa’s rating depended on the debt trajectory and the government’s ability to address economic growth.

She said higher GDP growth and lower fiscal deficits were key to South Africa’s credit profile.

“We know that reforms will be slow; we didn’t expect revolutionary changes. The more social tensions there are, the more difficult it is to institute reforms needed to fix the economy,” she said. “But the likelihood of a change in the rating is very low.”

Villa raised the government’s lack of a plan to tackle Eskom debt as an illustration of uncertainty, saying Moody’s wanted to see a plan that was agreed to by all stakeholders.

The struggling power utility poses the biggest threat to South Africa’s sovereign rating, with a mounting debt of R450 billion and a bloated wage bill.

Villa said the rating would be highly dependent on the capacity of the government to improve Eskom’s debt profile.

“We agree the National Treasury paper would be a positive step, but the question is about whether implementation would happen,” Villa said. 

“The likelihood of a change in the rating is very low.”

If Moody’s downgrades South Africa to sub-investment, the country’s liquidity status would worsen as the cost of raising debt would rise.

It would also leave the country with a struggle to pay back its creditors and the stock exchange would face capital flight as investors would dump government bonds.    

Fitch Ratings and S&P Global, the two other major ratings agencies, have had South Africa’s credit rating to “junk” for two years following the axing of Pravin Gordhan as finance minister at the end of March 2017.

Momentum Investments economist Sanisha Packirisamy said Moody’s acknowledged the risks to the country’s fiscal outlook, but noted a number of positives for South Africa’s sovereign rating.

“We still think there is a more-than-even chance of a downgrade to South Africa’s sovereign rating outlook to negative in November this year, with risks of a notch downgrade shifting higher in 2020, as reform implementation remains slow and as South Africa’s state-owned entities continue to weigh negatively on the country’s fiscal and debt profiles,” Packirisamy said.

NKC Research said Moody’s mixed messages on the country’s debt profile indicated that the agency already had discussions with the government and that there was progress in the pipeline. 

NKC analyst Jacques Nel said the ratings will hinge on Finance Minister Tito Mboweni’s Medium-Term Budget Policy statement next month.

“The importance of the mid-term budget can hardly be overstated. If it shows clear signs of a shift in policy in a more business-friendly direction (our current expectation), then we would expect Moody’s to affirm its current rating. If not, then the agency may change its outlook to negative in the expectation that South Africa’s economy will remain listless – reason for anyone to be pessimistic,” Nel said.