Moody’s gives SA a breather

While it is unclear if the Treasury had any representatives at the Moody’s Investors Service conference in Sandton on Tuesday, they would have broadly welcomed what was said.

The big takeaway is that though there is a degree of disappointment in the pace of reform, Moody’s, the last big ratings agency to have an investment-grade rating for SA, has yet to lose patience so much so, that we can take it as a given that there will not be a downgrade anytime soon.

This may come as a surprise to many who had expected that the May elections, followed by finance minister Tito Mboweni’s medium-term budget policy statement in October, would be potential game-changers.

The danger was that lack of progress would prompt Moody’s to move in November, not just changing the stable outlook to negative, but changing the downgrade itself due to a lack of progress in improving the growth and debt profile.

Speaking to journalists on Tuesday, Lucie Villa, Moody’s lead sovereign analyst for SA, made it clear that the company never expected a revolution, and that it was well aware that progress would be slow.

This is a refreshingly open-minded approach to the social and political constraints to speedy reform, for which it has been criticised by those who think it has been too lenient on SA.

SA has also been cushioned by the structure of its debt. While foreigners hold almost 40% of the country’s rand-denominated debt, we don’t carry the exchange-rate risk as it is denominated in local currency.

Whether by luck or design, SA has one of the longest-maturity profiles among emerging markets. It is thus spared the risk of constantly rolling over debt and having to pay higher interest rates.

However, Moody’s did raise red flags: Eskom, debt and growth. It singled out the lack of visible progress in presenting a plan for Eskom, which has long been described as the single most important risk for the economy. While the need to recapitalise and restructure Eskom is urgent, there was a recognition that politics — due to the fact that the utility is a big employer in a country with a jobless rate of almost 30% — would make it a difficult process.

While the agency did not set any thresholds that would trigger a move, it said any future moves would depend on the trajectory of debt and the economic growth outlook, which are both going in the wrong direction. And it would be wrong to assume there are no limits to its patience.

Even before the latest announcement of new aid for Eskom, Moody’s was expecting the debt-to-GDP ratio to peak at a much higher level than that anticipated by the Treasury.

An increase in borrowing and a reduction in growth forecasts do not make for a reassuring combination. They add to the sense that things will get worse before they get better, a concern that has also been reflected in local business being more vocal in demanding more action by the government to improve the investment climate.

The extent to which a Moody’s downgrade, if or when it does occur, will hurt the country’s assets is unclear.

While the argument has been made that falling off major bond indices that are used by investors for benchmarking purposes will be disastrous, there is also a view that the country’s debt is already trading as if it were junk.

The prospect exists of less constrained investors buying up SA debt after a downgrade in the search for yield, which remains a driving force in global markets.

For our own good, we have to assume that the consequences of a downgrade would indeed be negative, and it will serve us well to take the concerns of Moody’s, which rates the country Baa3, seriously.

IT WOULD BE WRONG TO ASSUME THERE ARE NO LIMITS TO THE AGENCY’S PATIENCE