Wrestling with Moody’s over SA

New Finance Minister Malusi Gigaba meets with the ratings agency on Friday morning.

New finance minister stares into the eyes of the re-rating monster in a series of top-level, Washington DC meetings.

While the new finance minister's engagement with key global financial institutions got under way last week in Washington DC with a number of meetings with the World Bank and International Monetary Fund (IMF), attention was on the meeting with Moody’s Investor Services early on Friday morning.

Moody’s was always going to be the big one, as any decision to downgrade South Africa’s local currency rating to below investment grade would have huge implications for the flow of global capital to the country.

One slip away

With Fitch already having downgraded the country’s local currency to “junk”, a downgrade from another one of the Big Three would entail forced selling on behalf of bond portfolios tracking key global government bond indices. Feedback from the meeting, in which SA Reserve Bank governor Lesetja Kganyago was also present, seems to be that Moody’s wanted assurances over reforms that would deliver economic growth, contain government spending and reduce borrowing, as well as the timing and scale of nuclear procurement.

Minister Gigaba reiterated the Treasury’s commitment to prudent fiscal discipline as part of government policy and promised substantive reforms to the governance of state-owned entities was a top priority.

Unlike Fitch and Standard & Poor’s, which downgraded the country in the aftermath of the Cabinet reshuffle, it appears Moody’s will take a wait-andsee position, giving the minister three months to enact changes before publishing any decision, said an official who attended the meeting. While this may be a temporary reprieve, time is of the essence. The minister was scheduled to meet IMF chief Christine Lagarde yesterday.

Wayne McCurrie, senior portfolio manager at Ashburton Investments, told Moneyweb’s Nastassia Arendse on SAfm’s Market Update on Friday that a junk downgrade was not the end of the investment world. The rand falling in value as a result merely meant adjustments needed to be made to portfolio managers’ cost estimates. “What junk boils down to is that the cost of money goes up and the rand will weaken. But it will go to a level where people will buy it because they see value at a certain level. Let’s just say if all the rating agencies downgrade us to junk on all of our debt, it doesn’t mean we won’t get any money coming into SA. We might just have to pay more for it,” he said.

Chasing yield

“But luckily enough for all of us now, overseas investors are putting money into emerging markets, including SA, so we see the rand at – I think R13.12/dollar was the strongest today (Friday). I think it’s R13.16 now. And when you consider it, the rand did strengthen dramatically before all the recall and the Cabinet reshuffle. But when you compare it to exactly a month ago, it’s not all that different. It certainly is still stronger on the year.”

Rand is still stronger on the year.