Moody’s perspective delivers a mild mood boost

Next time I get really depressed about the state of the economy, I will just take myself off to a Moody’s conference. The tone of the ratings agency’s annual Sub-Saharan Africa summit in Johannesburg this week was remarkably calm, coming as it did amid bleak economic growth and business-confidence figures, with the rand hitting new lows and markets wondering how bad the fiscal news will be at next month’s medium-term budget. Addressing questions from summit participants, the ratings agency’s sovereign analysts drew contrasts between SA and the most vulnerable of the emerging markets, telling the “SA is not Turkey or Argentina” story, as rival ratings agency S&P did last week and Reserve Bank governor Lesetja Kganyago did in an interview with the Financial Times, in which he emphasised that SA’s institutions (such as the Bank) were a great deal stronger than Turkey’s or Argentina’s.

Moody’s sovereign analyst Lucie Villa noted that SA’s well-developed domestic capital markets meant it was a lot less reliant on external funding than Turkey, with the government’s foreign currency liabilities at 10% of total debt in SA against 40% to 50% in Turkey. Villa drew attention, too, to the particularly long 13-year average maturity of SA’s debt — which means that the extent to which higher rates today translate into higher debt costs tomorrow is very small, and also, crucially, ensures that the probability that SA will have to run to the IMF is “extremely low”.

Perhaps most notably, given the pressures on the spending and revenue side of the national budget, the Moody’s analysts are still fairly comfortable with SA’s fiscal picture. They still see government debt stabilising as a percentage of GDP over the medium term, even though they flag the budgetary risks of the rising public-sector wage bill and rising interest costs. Even before they learnt of the recession they were already expecting that this year’s budget deficit would come in at about

4%, against the National Treasury’s February target of 3.6%. As they see it, there’s still a good track record, and the political commitment to the macroeconomic policy framework is still there.

Adding to the (relative) optimism at the summit was the Reserve

Bank’s head of financial markets, Leon Myburgh, who noted that the starting point mattered when it came to counting how far the rand had fallen: SA’s currency is down 20% this year, not as bad as the currencies of Turkey or Argentina but still well below the emerging-market average. But that’s in part because of its bounce (from R15 to the dollar to R12) in the first quarter of this year. Compare it with November and it’s down only about 10%, in line with the JP Morgan emerging-markets foreign currency index.

Not that any of this is a free pass. That we are not Argentina or Turkey is pretty cold comfort anyway, and that we’re even the subject of a “compare and contrast” with those economic and political basket cases is depressing, especially given SA’s very weak growth and employment prospects.

But Moody’s analysts also made very clear what the ratings agency expects in the October budget and beyond. By implication, if the government doesn’t deliver, we will again be at high risk of a downgrade. “We are expecting some fiscal adjustments,” Villa emphasised. The expectation is that the government will take some firm steps to rein in spending and ensure the debt doesn’t balloon.

So Moody’s isn’t taking the pressure off SA to deliver economic and fiscal reforms. Nor should anyone else. SA is in the fortunate position of having some robust institutions that have survived efforts at state capture, and a resilient economy, even if that economy doesn’t actually grow. But that just makes it more important to guard and nurture our institutions, and to turn promises of growth-boosting reforms into reality. Otherwise, the next Moody’s summit won’t provide any sort of antidote to depression.

The ratings agency isn’t taking the pressure off SA to deliver economic and fiscal reforms