Moody’s adds to Gordhan’s pressures

Political push on the Treasury a concern for ratings agency

RATINGS agency Moody’s changed the outlook on SA’s credit rating to negative from stable, the third adverse action concerning the country in less than two weeks.

However, it left the rating two notches above junk or subinvestment grade late on Tuesday, partly because of the reappointment of Finance Minister Pravin Gordhan.

Persistent low growth and a growing risk of spending targets being exceeded because of political pressure were the main reasons behind moving the outlook to negative, Moody’s said.

It kept the rating unchanged at Baa2 because of SA’s track record of “sound” macroeconomic policies.

The changing of the outlook to negative indicates that Moody’s could downgrade SA next year if the economy does not grow faster or if the state strays from fiscal prudence.

The only comfort is that even if it does downgrade, the rating would still be investment grade and in line with those of rivals Fitch Ratings and Standard & Poor’s. They rate SA just one level above junk status.

Moody’s has always been the least pessimistic of the three, giving SA a higher rating even when the other two downgraded.

But even if a downgrade is not to junk status, it still raises the cost of borrowing, particularly for state-owned enterprises that have to borrow from global markets to finance multibillion-rand infrastructure projects.

The fact that S&P and Moody’s now attach a negative outlook to their ratings while Fitch has a stable outlook puts pressure on Mr Gordhan and the rest of the government to do more to boost growth.

The Treasury yesterday said Mr Gordhan’s appointment would “ensure policy continuity”. It was addressing Moody’s concerns about the rising risk of fiscal slippage, it said.

“The minister has affirmed that government will stay the course of sound fiscal management and focus on fiscal consolidation and debt stabilisation in the medium term,” it said.

“He assured that any extra expenditure would only be accommodated if extra revenue is raised and any revenue-raising opportunity would be carefully considered so as to ensure that it does not damage growth or affect the poor negatively.”

Last week’s firing of former finance minister Nhlanhla Nene and his replacement first by Desmond van Rooyen and then Mr Gordhan prompted investor wariness, causing the rand to crash to new lows against all major currencies.

Peter Worthington of Barclays highlighted Moody’s citing of “political pressures” as a reason for its negative outlook, referring to the debacle around Mr Nene’s axing.

“It is clear that a lot of hard-to-fix damage has been done to confidence levels,” he said.

“Even without considering the cost of expensive new programmes such as nuclear power or national health insurance, political pressures were growing, calling into question the government’s continued ability to maintain spending restraint,” Moody’s said. The public sector wage hike above the 6% that was budgeted for was cited. Moody’s sees next year’s local elections as a source of “political pressure”.

In addition to low growth due to structural reasons, Moody’s identified the effects of a weak rand on inflation and interest rates as risks to growth. SA remained vulnerable to China’s slowdown, the commodities downturn and its delay in dealing with power constraints.

Any “further shocks” to growth and a lower commitment to fiscal discipline and debt stabilisation would trigger a downgrade, the agency said.

THE last time Pravin Gordhan was appointed finance minister was in May 2009. The world was in the middle of the global financial crisis, SA had been sucked into its first recession for 17 years, and he faced the prospect of crafting fiscal policy in a context in which government revenues were falling tens of billions of rands short of budget targets.

Second time around, the fiscal space he had then no longer exists, there’s no global rescue effort coming to SA’s aid, the economy is arguably in even worse shape — and SA has just come closer to the edge of a financial precipice than it ever did during the global financial crisis, or even during the 2001 rand crisis.

There’s no saying what would have happened when markets opened on Monday if President Jacob Zuma hadn’t reversed his decision to appoint a backbencher to the key finance portfolio and instead put Gordhan back in the post he occupied from 2009 to 2014. But there was a real concern about what would happen to the banking sector, and indeed the rest of the financial services sector if the slide in confidence continued. The danger would have been of systemic consequences, of a “negative feedback loop” in which a much higher cost of funding and much lower share prices put the banks and their customers under pressure, forcing the banks to pull back on granting credit or on providing liquidity to the markets, adding to the economy’s woes and so undermining the banks’ position even further.

Last week’s market rout had the potential to hit banks, and insurers, from multiple angles. They could, for example, have been forced to go to the market or their shareholders to raise capital at the worst possible time, when the bottom had fallen out of confidence and share prices.

This was the fate of many global banks in 2008-09 that SA’s banks managed to avoid.

This time too, the financial sector managed its way through those two crazily volatile days, and as Reserve Bank governor Lesetja Kganyago pointed out this week, prices continued to be quoted in the market and the market continued to trade, “testimony to SA’s deep and liquid financial markets that could withstand shocks of this magnitude”.

But it was no coincidence that a bunch of financial sector CEOs joined the queue to urge the African National Congress to force Zuma to appoint a finance minister who could restore confidence and stabilise the markets before they opened on Monday.

Nor was it a coincidence that, along with firm assurances from the Presidency and Gordhan on government’s commitment to fiscal prudence, Gordhan promised to intensify the pace of financial sector reforms, noting “a stable financial sector is central to oiling the real sector of the economy”.

But it was his bold, almost religious commitment to stick to government’s “sacrosanct” expenditure ceiling at his rapidly convened Monday afternoon news conference that probably had the most effect, along with his sharp comments about the governance of state-owned entities and his undertaking that if need be, he would cut spending to stabilise government debt. The question is whether he can deliver on his bold commitments.

There are two schools of thought. One is that his position is stronger than ever and he will now be able to stand up to Cabinet colleagues who have been averse to making the tough choices required to ensure government sticks to its fiscal targets.

Standard Bank chief economist Goolam Ballim believes Gordhan now has more authority than he had in his earlier term as finance minister, because of the manner in which he was installed. “The chances of his being recalled are near-zero, therefore he can be emboldened and fortified. He can shift the equilibrium.”

But others are a lot more sceptical about whether anything has changed since this time last week. This includes two ratings agencies. Fitch (which downgraded SA’s sovereign rating early last week) came straight out with a statement following Gordhan’s Monday media conference, saying the U-turn “doesn’t remove policy uncertainty” and warning it would be watching February’s budget closely. Moody’s followed on Tuesday evening by putting SA’s rating on negative outlook, citing concerns about economic growth (which it said wouldn’t reach 3% any time before 2020) and about “the rising risk of fiscal slippage”.

A ratings downgrade itself could make Gordhan’s task of restraining spending growth more difficult because it would raise the cost of servicing government’s R1.8-trillion debt, which last week’s bond market rout has already affected anyway. It’s clear a downgrade remains on the cards, with Gordhan saying on Monday only that “we shall endeavour to protect the investment grade rating of SA”.

As finance minister, Gordhan can shape fiscal and monetary policy, but there is not much he can do about growth. No doubt he will go all out to assuage the scepticism. But if his task was tough the last time he put his feet under the desk as finance minister, it is immeasurably tougher this time.