A RAT­INGS DOWN­GRADE IS PRICED IN AL­READY

Financial Mail - Investors Monthly - - Opening Bell -

wo key events will be piv­otal in de­ter­min­ing the per­for­mance of the rand and fi­nan­cial mar­kets in the weeks lead­ing up to Christ­mas.

The first of those red let­ter days is Fri­day De­cem­ber 4, when both Fitch and Stan­dard & Poor’s (S&P) are sched­uled to release sov­er­eign rat­ing re­views on SA. The sec­ond is Wed­nes­day De­cem­ber 16. That is when the last fed­eral open mar­ket com­mit­tee meet­ing for the year takes place in the US.

It would hardly come as any sur­prise if Fitch cuts SA’s long-term for­eign cur­rency rat­ing by one notch to BBB-. For one thing, this will bring its rat­ing in line with that of S&P, which al­ready has SA on the last rung of the in­vest­ment grade lad­der.

Fitch has be­come in­creas­ingly neg­a­tive about SA’s eco­nomic growth out­look and per­ceived cred­it­wor­thi­ness this year.

Its sen­ti­ments would not have been im­proved by the Oc­to­ber mini-bud­get, in which fi­nance min­is­ter Nhlanhla Nene was forced to down­grade the coun­try’s growth out­look while push­ing out the pace of fis­cal con­sol­i­da­tion yet again.

Trea­sury’s growth forecast is now roughly in line with the con­sen­sus — at 1,5% for 2015 and 1,7% for next year.

Things are likely to get a bit bet­ter af­ter that. Trea­sury expects growth to re­cover to 2,6% in 2017 and 2,8% in 2018 — which is a more op­ti­mistic as­sess­ment than fore­casts of the SA Re­serve Bank, the In­ter­na­tional Mon­e­tary Fund and lo­cal an­a­lysts.

In par­tic­u­lar, econ­o­mists have ques­tioned the wis­dom of Nene’s trea­sury re­peat­edly build­ing an au­to­matic growth up­swing into its bud­gets. Its growth fore­casts have had to be re­vised down for the past five years in a row.

The prospect that growth could re­main low and stag­nant at 2% or less for the next three years or longer is the big­gest risk to the medium-term bud­get.

As long as growth re­cov­ers as planned, the medium-term bud­get pro­jec­tion is that the deficit should nar­row to around 3% of GDP and gross debt should sta­bilise just in­side 50% of GDP, al­beit by 2018/2019 — which is a year or two later and at a higher level than be­fore.

Trea­sury feels that this de­gree of “fis­cal slip­page” is small enough to keep fur­ther rat­ing down­grades at bay for now.

An­a­lysts are less con­vinced, but the mar­ket will have the an­swer to this ques­tion in the first week of De­cem­ber.

Kon­rad Reuss, S&P’s MD for SA and sub-Sa­ha­ran Africa, says S&P is not alarmed by trea­sury’s softer bud­get deficit pro­jec­tions, since it re­gards th­ese as “more re­al­is­tic” than the rapid fis­cal con­sol­i­da­tion path which it had pre­vi­ously set out.

For now, S&P “sits com­fort­ably where we are with the rat­ing”, says Reuss.

How­ever, a lot will de­pend on growth in the econ­omy.

Reuss feels trea­sury’s forecast of the ex­tent to which eco­nomic growth will re­bound in the outer two years of the medium-term frame­work “looks a bit op­ti­mistic”. If eco­nomic growth con­tin­ues to fall short of expectations, that would prob­a­bly trig­ger a dis­cus­sion within S&P around whether the out­look on SA’s sov­er­eign rat­ing needs to change from “stable” to “neg­a­tive” to re­flect the greater risk to the fis­cus.

Nonethe­less, the prospect of SA’s rat­ing be­ing cut to non­in­vest­ment grade or junk sta­tus is “very re­mote”, he says.

One of the key fac­tors that con­tinue to un­der­pin SA’s rat­ings is that its fis­cal and mon­e­tary pol­icy au­thor­i­ties — na­tional trea­sury and the Re­serve Bank —

Most of the clients now ex­pect Fitch to down­grade SA’s rat­ing in De­cem­ber, even if they keep the out­look stable

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