Rat­ings agency says too few changes to war­rant re­view

SA caught slightly un­awares

The Star Early Edition - - BUSINESS REPORT - Philippa Larkin – Ad­di­tional re­port­ing by Ka­belo Khu­malo

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.

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