All-round 2018 junk credit ratings loom

Moody’s sees evidence of systemic corruption SA downgraded one notch above junk

SA faces the prospect of junk credit ratings from all three ratings agencies in 2018 after a bearish Moody’s downgraded SA to just one notch above junk status on Friday, but warned of further downgrades.

Moody’s, which had previously given SA credit for strong institutions, cited a weakening of institutional strength as a key driver for the decision to downgrade, along with SA’s reduced growth prospects and rising public debt.

It warned that with political tensions rising in the run-up to the ANC’s electoral conference in December and continuing in the run-up to the 2019 elections, it was unlikely that political consensus could be reached to support investment and reforms quickly enough to reverse the negative effect on growth and on the government’s balance sheet.

The Treasury called on all South Africans to work even harder to tackle the concerns raised by Moody’s. “The foundation for a higher growth path and socioeconomic development has already been made,” the Treasury said. Finance Minister Malusi Gigaba had called a news conference on Monday “to talk about the way forward for the SA economy”, the Treasury said.

The CEO Initiative said the manner in which SA responded to the ratings action was of utmost importance to improve the lives of citizens and inspire confidence. “We also need to demonstrate to investors that we are serious about dealing with corruption and improving governance and service delivery at our state-owned institutions.”

Moody’s said the deterioration of SA’s institutions had become most apparent in recent months, with “evidence of systemic corruption, excessive reliance on the courts and the risk of judicial overreach”.

It said the March cabinet reshuffle was likely to delay initiatives to reform state-owned enterprises, support small- and medium-sized businesses and create jobs. The one-notch downgrade by Moody’s had

been expected in the market, especially after last week’s much worse than expected GDP figures suggested SA’s economy could grow even more slowly than expected in the next couple of years. However, the negative tone of Moody’s surprised some, as did the negative outlook, which indicates Moody’s will consider a further downgrade within the next two years.

Moody’s is now the only agency with investment grade ratings on both SA’s foreign currency debt and its local currency, rand-denominated debt.

S&P Global Ratings junked SA’s foreign currency rating in April, leaving the local currency rating at investment grade. But it too has a negative outlook on SA. Fitch has junked both ratings, but has a stable outlook.

Moody’s — scheduled to provide further updates on SA in August and in November — cut its growth forecast to 0.8% for 2017 and 1.5% in 2018. It said the debt to GDP ratio would continue to rise to 55% in 2018-19.

However, it also emphasised SA’s credit strengths, including deep and well-developed domestic financial markets; a well capitalised banking sector; a coherent macroeconomic framework; and low levels of foreign currency debt.

If both Moody’s and S&P were to junk the local currency rating, it would see SA excluded from the World Government Bond index, prompting capital flight of about R86bn–R130bn.

Analyts expect that the ratings agencies may wait until after the ANC’s elective conference in December, but that further cuts may be inevitable. Rand Merchant Bank economist Carmen Nel said Moody’s signalled that even in the case of a market-friendly December outcome, it would be a compromise, and could still pose challenges to policy implementation.

Stanlib economist Kevin Lings said unless the government was able to meaningfully encourage private sector investment, Moody’s would be forced to downgrade SA to below investment grade. This would have significant implications for SA’s ability to attract the foreign investment it needed, Lings said.