Phew! Moody’s gives nod to Cyril’s reforms
Agency keeps debt at investment grade, giving SA ‘a chance to sort out our problems’
● South Africa has received another reprieve to get its house in order — international credit ratings agency Moody’s has kept the government’s debt rating unchanged.
Late on Friday Moody’s confirmed South Africa’s rating at Baa3 and revised the outlook to stable from negative. This was widely expected, especially following Cyril Ramaphosa’s rise to the presidency a month ago, after which he began to boot out problematic ministers and heads of institutions in a wide-ranging clean-up campaign to tackle corruption and maladministration.
Moody’s said the recent change in political leadership “offers a real prospect of a decisive reversal in that erosion of strength”. It added that steady progress in meeting the objectives set out in the president’s recent state of the nation address would be needed if the recovery in confidence that would be essential for the country’s economic and fiscal prospects was to be sustained.
Moody’s had kept South Africa on watch for a downgrade over a 90-day period. It was the only one of the three largest international rating agencies still to have the government’s foreign- and rand-denominated debt on investment grade.
The risk of a further downgrade had diminished significantly, economists said.
It was expected that a downgrade by Moody’s would have triggered the exit of about R100-billion in foreign capital by lenders who track South African bonds through the Citi World Global Bond Index. The rand would also have fallen sharply.
“We are being given a chance to sort out our problems. It’s very positive from an investor perspective. The risk has diminished significantly. People have been caught up with Ramaphoria,” said Lumkile Mondi, a senior economics lecturer at the University of the Witwatersrand.
“He has delivered on what he set out to deliver with the restructuring of stateowned enterprises and the South African Revenue Services move. He is really trying to stick to what he promised: to challenge issues head-on,” Mondi added, referring to the suspension of SARS commissioner Tom Moyane this week and the appointment of a new board at SAA.
The ratings decision is expected to boost the chances of an interest-rate cut of at least 25 basis points when the Reserve Bank’s monetary policy committee meets this week. A rate cut could boost consumer spending.
Market reaction to the Moody’s rating was expected to be positive although the outcome was priced in leading up to the decision. The government’s R186 benchmark bond touched 7.97% in February — a level last seen in early 2015.
RMB currency strategist John Cairns said a moderate strengthening of the rand and bond yields was expected, given the Moody’s decision. But he added: “The view on how the markets would react to a downgrade varies significantly. There are some who think maybe we’d only see a 30c-40c movement in dollar-rand, and some who expect we could go over R13/$.”
During a roadshow to London and the US a week ago, Treasury officials met investors and all three credit ratings agencies. National Treasury Director-General Dondo Mogajane told Business Times ahead of the Moody’s announcement: “I’m positive that they understood our story. In October they were sceptical.”
There is evidence of a turnaround since the medium-term budget policy statement in October. Mogajane said the outlook then was bleak, with no concrete solutions. Debtto-GDP was approaching the ceiling. The Treasury had projected a debt-to-GDP ratio of 60.8% towards the end of the medium term, but this was revised to 56.2% in the February budget. He said the primary balance had also improved — indicating that debt sustainability was under control. The budget deficit forecast had narrowed to 3.5% in February from 4.5%.
Mogajane said ratings agencies understood South Africa was dealing with problematic SOEs. “The action we took at Eskom is a good, clear indication that South Africa is moving ahead. We’re in a good space.”
He said investors were excited by the reinstatement of Nhlanhla Nene to the finance ministry and the return of Pravin Gordhan as
Business is in a far stronger position than it has ever been. So is civil society. Lumkile Mondi Senior economics lecturer at Wits
public enterprises minister. “They are comfortable that Gordhan is going to clean up.”
The Treasury intends to return to the debt market next month to raise $3-billion (about R35-billion) in foreign bond issuance. “When the sentiment is as positive as it is, it’s a good time because we will get it cheaper,” Mogajane said.
“We have all the right ticks in terms of what we should be saying about S&P; we’ve got all the right ticks in terms of what we should be saying about Moody’s. We are fine. We were able to turn the ship in the short space of time between October and now. We should be proud of ourselves.”
Although the threat of a downgrade had diminished, PwC economist Christie Viljoen said policy uncertainty remained over land expropriation without compensation and the Mining Charter. “If these issues are not resolved, or changes are made that adversely affect the economy, ratings agencies would take a weaker view on the quality of South Africa’s institutions and political governance,” Viljoen said.
Mondi said questions lingered over the macroeconomic framework the government planned to adopt to improve unemployment, and the fact that South Africans and the government remained highly indebted. “These questions need to be addressed and will delay any possible upgrading.”
However, the pendulum had swung, he said, with business and society no longer relying heavily on the state to address challenges. “I think business is in a far stronger position than it has ever been. So is civil society around asking for accountability. So we really have an opportunity to cut what Ramaphosa calls a new deal, given the readiness of stakeholders, but also not just taking any nonsense from government.”
A downgrade would have been expected to trigger the exit of about R100-billion