Ratings agency says too few changes to warrant review
SA caught slightly unawares
SOUTH AFRICA was caught off guard late on Friday when ratings agency Moody’s failed to provide an August 2017 sovereign review for South Africa “as the agency felt there were insufficient changes since its last review to warrant another one”.
This after a week of rand volatility in which the rand swung higher on the vote for Parliament’s secret ballot for a vote of no confidence against President Jacob Zuma, and then sharply reversed gains after he survived an eighth motion of no confidence against him.
National Treasury’s chief director for strategy and risk Mampho Modise said: “They won’t be making an announcement today. They have made two announcements already, so they did not see a reason for them to have a review committee because things haven’t changed.”
But Annabel Bishop, the chief economist of Investec, said yesterday that the rand remained volatile as global factors continued to impact the domestic currency.
“Recent lower than expected US PPI and CPI inflation outcomes were taken by the financial markets to indicate the possibility of a slower US rate hike trajectory.
“With foreign flows into emerging markets (EMs) debt strengthening EM currencies, weaker than anticipated US inflation outcomes signal the possibility of further delays in US monetary normalisation, and so continued risk-on into EM debt. Specifically, risk-on has seen foreign investors favour local currency emerging market debt given the comparative lower yields in developed economies’ debt, particularly in the Euro area.”
She said 2017 showed the mild pick-up in global growth begun in 2016 was continuing and becoming broad based, as global trade continued to lift, along with industrial production. Imports and investment were also strengthening internationally as confidence improved, and global lending conditions remain favourable, which were all sustaining the upswing, she said.
“The positive sentiment resulting from the lift in global growth has also contributed to risk-on in the financial markets, and so the strengthening trend in EM currencies.
“However, while the modest upswing in global growth is expected to gain traction, South African growth is expected below both world and the sub-Saharan region’s forecasts.
“As actual growth continues to fall well below potential growth in South Africa, narrowing output gaps and moderating inflation have raised the prospects of a more accommodative monetary policy stance for South Africa. A 25 basis points (bp) cut occurred in July and we expect a further 25bp drop in the repo rate this year.”
She said South Africa’s recent, unexpected 25bp cut in its repurchase rate was likely the start of a shallow interest rate cutting cycle.
Moody’s spooked the rand to a three month low last week when it released its research note on South Africa and warned pressure seemed to be growing on the Reserve Bank, and the Treasury, to implement expansionary policies.
Moody’s said while it welcomed the Reserve Bank’s interest rate cut, it also indicated political pressure on the bank.
The rating agency also warned that it viewed the SA Reserve Bank’s independent monetary policy as a key pillar in its assessment of South Africa’s gradually deteriorating institutional strength.
Bishop said further interest rate cuts in South Africa would depend, among other factors, on the consumer price index (CPI) inflation outlook, exchange rate movements and South Africa’s credit ratings.
“A 25bp cut is possible in January 2018, but that will likely be the bottom of the cycle as CPI inflation is unlikely to run below 5.5 percent year-onyear persistently, and the differential between the repo and CPI inflation rates will become too narrow,” she said.
Alet Opperman, an analyst at TreasuryOne, last week said Moody’s was unlikely to further downgrade South Africa’s credit rating.
Opperman’s views were shared by analysts from Nedbank, who in a note, said Moody’s would likely keep the rand and foreign currency ratings unchanged at Baa3 with a negative outlook.
“We believe this is premised on elevated political risk, a lack of structural reform implementation, a shift in focus to radical economic transformation which may worsen fiscal metrics, a push for nuclear which will likely also worsen fiscal metrics, rising contingent liabilities which would place greater burden on state resources, and deteriorating growth metrics, confidence levels and private sector investment,” Nedbank said.
Moody’s warned last week pressure seemed to be growing on the Reserve Bank to implement expansionary policies.