Distressed SA faces Moody’s downgrade

• Agency halves growth forecast for country and says economic contraction is a credit negative

The first recession in almost a decade could cost SA its remaining investment-grade rating, with disastrous consequences for the country and consumers who are already under strain from tax increases and near-record petrol prices.

Moody’s Investor Service on Thursday halved its 2018 growth forecast for the country and said economic contraction in the first six months of the year was a “credit negative”.

Moody’s is the last of the big three international ratings agencies to have SA’s long-term foreign-currency debt at investment grade. Moody’s decision to push the country’s debt into junk would see SA fall out of key gauges, such as Citigroup’s World Government Bond index, which may prompt investors to dump as much as R100bn of SA assets.

“The recession has heightened the country’s risk of suffering yet another credit downgrade in the second half of the year,” said Citadel chief economist Maarten Ackerman.

This week’s GDP numbers showed the economy shrank 0.7% in the second quarter, adding to a 2.6% drop in the first three months of the year.

The situation undermined President Cyril Ramaphosa’s effort to revive the economy and attract investment, and leaves him politically vulnerable ahead of elections due in 2019.

Moody’s expects the economy to grow just 0.7% in 2018, down from a previous forecast of 1.5%.

Ramaphosa said on Thursday that SA would soon recover. “All these things that are happening now are transitional issues that are going to pass.

“I will be meeting with the business community soon, so that we rally everyone together and pull our country out of the situation that we are in.”

At the end of March, Moody’s affirmed SA’s investment-grade credit rating and revised its credit outlook to stable from negative, saying the previous

weakening of national institutions was gradually reversing.

Its next review is expected on October 12, ahead of the medium-term budget policy statement at the end of October.

“If they make a move it would be to a negative outlook,” said Citi economist Gina Schoeman. “This would precipitate a downgrade at the beginning of 2019.”

The shrinking economy may raise concern that the government will need to revise its budget deficit higher, at a time when the government is under pressure to unveil a stimulus package. It is not clear how such a plan will be funded.

“It’s not about if, it’s about when,” Schoeman said.

The Moody’s decision hinged on Ramaphosa’s ability to swiftly implement policy changes and reignite the economy, said BNP Paribas economist Jeff Schultz.

“After the February budget, if we don’t see a significant improvement in policy and growth and investment, then Moody’s will have no choice but to downgrade,” Schultz said.

S&P Global Ratings and Fitch both downgraded SA to junk status in 2017.

MOODY’S DECISION HINGES ON RAMAPHOSA REIGNITING THE ECONOMY