A loud and clear warning

Look on the bright side. After the political ructions of recent months, SA can be grateful that it has survived another round of ratings updates with its investment grade local currency ratings from Moody’s and S&P intact.

Next time, SA may not be so lucky. And that is the message that comes out loud and clear, not only from Moody’s, which late on Friday night downgraded SA’s foreign and local currency ratings to just one notch above subinvestment grade, or junk status, but also from the other agencies.

Moody’s has traditionally been the most optimistic about SA, and often the most insightful about its political landscape. It was the one agency that took SA right up to the coveted A rating band before the downgrades began in 2012. It has also been the agency that has been most cautious in the negative actions it has taken, and as pressure on the public purse has intensified. While others were increasingly concerned about the political “noise” and what it might mean for policy, Moody’s was positively enthusiastic about the 2016 local government elections and the political contestation the outcome reflected.

It kept its rating at Baa2, still two notches into the investment grade band. Even after President Jacob Zuma’s “night of the long knives” cabinet reshuffle, Moody’s still gave this country the benefit of the doubt, putting its rating on review for a downgrade rather than cutting it immediately, as did S&P and Fitch. So the decision Moody’s has now made is a carefully considered one – and that makes the negative tone of the report it issued on Friday all the more disturbing.

In effect, it has given SA a one-and-a-half notch downgrade, taking the ratings down to the edge of investment grade at Baa3 and putting it on negative outlook. That means that it could look to downgrade further if it turns out that SA’s politics do even more damage to growth and fiscal strength than Moody’s has factored in.

Not that Moody’s hasn’t factored in a fair bit of damage already. In April, it put SA on review because the cabinet reshuffle seemed to send the wrong signals. Now, the agency points to “systemic weakening” of SA’s institutional framework as the number one driver of its decision to downgrade – and says it wasn’t just the cabinet reshuffle.

SA’s institutional strength has been gradually eroded, says the agency, and policy makers’ commitment to promised reforms is uncertain. The agency believes that not only is it unlikely that “a political consensus will emerge which supports investment in the economy and reinvigorates the reform effort”, but the opposite may be the case, with “heightened political dysfunction”.

It spells out clearly what could happen to growth and the fiscus. It sees government debt continuing to rise, instead of stabilising as government has promised. The risk to the government balance sheet from state-owned enterprises with weak governance and – in Moody’s polite words – “poor procurement practices”, is real.

The message from S&P is more of the same. Like Moody’s, it has SA on negative outlook and a downgrade to Moody’s and S&P’s local currency ratings would hit hard because of the large quantum of foreign investment in SA’s local currency bonds indexed to Citi’s World Government Bond Index. Local currency downgrades by S&P and Moody’s would push SA out of the index, prompting capital flight of R86bn to R130bn.

The hit to business and consumer confidence could be even more severe. The risk is that SA could enter a downward spiral of recession, missed fiscal targets and more downgrades, which would hit the economy – and jobs and incomes – even harder. It is that political “dysfunction” that Moody’s speaks of that is wrecking what once was a robust economy. The clock is ticking to the next downgrade. SA has been warned.

THE COUNTRY’S INSTITUTIONAL STRENGTH HAS BEEN GRADUALLY ERODED, SAYS MOODY’S