A junk call by Moody’s would be no shocker for bond market

● The government’s debt costs have risen ahead of Moody’s ratings action this week, suggesting that the bond market has already priced in a credit rating downgrade to junk status, economists said.

Dave Mohr, chief investment strategist, and Izak Odendaal, investment strategist, both at Old Mutual Multi-Managers, said in a research note on Wednesday that the government’s 10-year borrowing cost was 9% and the borrowing cost for households — the prime overdraft rate — at 10.25%, was more than twice nominal national income growth.

“Although there is a risk of SA losing its final investment grade rating [from Moody’s], the elevated yield suggests we are very much priced in as junk status,” they said.

Moody’s is the only ratings agency that has SA on investment grade. A downgrade could trigger SA’s exit from several major indices, including the World Government Bond Index, which could see more than R100bn in portfolio outflows from SA.

“Interest rates are therefore squeezing the economy. There is also little support from fiscal policy, as the government has to tighten its belt to reduce debt growth, but also to bail out struggling state-owned enterprises, particularly Eskom.”

Sanisha Packirisamy, economist at Momentum Investments, said Momentum expects a downgrade in the outlook from stable to negative. “But the rating, in our view, is likely to remain unchanged,” she said.

“Moody’s noted that the breach in the expenditure ceiling was viewed as a one-off and acknowledged that outside of the additional allocation to Eskom, expenditure (including projections for the wage bill in the next three years) had in fact been pared back.

“We expect Moody’s to take a wait-andsee approach to Eskom, to review its turnaround strategy and the proposed unbundling model once more information comes to light,” she said.

Packirisamy said that in terms of growth, Moody’s took a longer-term view and in this respect trend growth would have a greater impact on the rating relative to growth in the first half of 2019.

She said a ratings downgrade to junk status could still result in money flowing out of SA’s bonds and equities.

This may negatively affect the rand. But there could be some offset if SA is included in higher-yielding indices, “in which case SA could look attractive from a lower-graded composite of countries”.