A RATINGS DOWNGRADE IS PRICED IN ALREADY
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