COST OF RATINGS
Interview with Minister Malusi Gigaba on the impact of the credit ratings
Report: Executive Editor Adri Senekal de Wet (AW). Interview with Finance Minister Malusi Gigaba (MG) on the cost of rating agencies. AW: Do we pay all the rating agencies to be rated? If so, can you indicate the amount? What did the government (Treasury) pay S&P’s Global Ratings, Moody’s and Fitch over the past five years? MG: The government of South Africa pays rating services fees in order to be rated. In this regard, the rating services fees are paid to Moody’s Investors Service, S&P’s Global Ratings, Fitch Ratings and Japanese Ratings and Investment Information. AW: What did the government (Treasury) pay S&P’s, Moody’s, Fitch over the past five years? MG: We are still consulting National Treasury’s legal department on whether or not rating services fees information can be disclosed to third parties. AW: Please share your views on the impact of “country and company ratings” on the South African economy. MG: The impact of country and company ratings on the economy of South Africa will translate to:
Higher borrowing costs for the government and state-owned companies (SOCs) – Investors would react to the news of adverse rating actions by charging high risk premiums on borrowings of government and SOCs. As a result, more money will be directed towards debt servicing and less on infrastructure spending. The impact will also reduce the financial flexibility and ability of SOCs to honour existing debts and as a result, these debts could migrate to the balance sheet of the sovereign.
The government’s budget will be directed less towards core spending (infrastructure, health, education, housing, social security services, for example) and more on debt service costs.
Reduced demand for South African stocks and long-term investments (bonds, equities and foreign direct investments) as risk perception heightens.
A weakened rand, which will increase the price of imported goods and services, thus resulting in high inflation and rising food and petrol prices.
Society’s disposable incomes will be less flexible and less money will be able to pay for necessities such as groceries, transport, school fees, etc. AW: Are you aware of the various law cases against S&P’s, even in the US? MG: We are aware of the lawsuit that is in the public domain tied to the 2008/09 global economic crisis. The US government brought a case against S&P’s in 2013, arguing that the rating agency defrauded investors. In 2015, S&P’s was fined $1.5 billion (R19.15bn). So far, South Africa has not instituted any litigation against rating agencies. AW: When can we expect the Brics Rating Agency to be launched? What will your role be? MG: The political leadership is still engaging on the matter and as such we cannot comment at this stage. AW: With reference to the National Development Plan (NDP), what is the impact of South Africa’s rating as a country on the successful implementation of the NDP? MG: The rating agencies have explicitly cited that successful implementation of the NDP is critical for South Africa to address low economic growth and challenges of unemployment, poverty, income inequality and skill shortages. Among other factors, demonstrating concrete efforts in implementing the announced economic growth reforms and the 9 Point Plan; which talks to the milestones of the NDP; aimed at addressing the structural bottlenecks and improving the growth outlook will translate to favourable rating outcomes according to rating agencies.