Renewed fight to save SA’s rating

Moody’s forecast sets stage for intense period of interactions

MOODY’s has trimmed its forecast of SA’s economic growth rate to 0.2% this year and 1.1% next year, setting the stage for an intense period of interactions with investors and ratings agencies in coming weeks, as government and business step up efforts to avert a downgrade of SA’s credit rating.

This comes after Moody’s this week put the five “most sensitive” state-owned entities (SOEs) on review for a downgrade, and cut its forecast for SA’s economic growth rate to 0.2% — but made it clear that measures to reform labour markets and SOEs could stabilise SA’s ratings outlook.

Moody’s is in SA next week for its annual conference, and the Treasury has confirmed that the deputy president, the minister of finance and other stakeholders will be meeting with the ratings agency, “to reassure the rating agency that government has made progress on governance and financial matters of SOEs”, a Treasury spokeswoman said.

Members of the informal CEO group working with Finance Minister Pravin Gordhan were due to meet him last night to firm up some of the initiatives that the partnership between business, government and labour has committed to in an effort to boost growth and investor confidence — with an announcement on details of the new R1.5bn small business fund expected this weekend.

A group of CEOs will join Gordhan and Reserve Bank governor Lesetja Kganyago in New York early next month for the fourth annual “SA Tomorrow” conference, at which they will meet major US investors, ahead of the medium-term budget that the finance minister tables in Parliament on October 26.

While rivals S&P Global Ratings and Fitch have SA’s sovereign credit rating just one notch above subinvestment grade, “junk” status, Moody’s has it two notches above.

In a credit opinion released late on Wednesday evening, Moody’s cut its growth forecast from May’s 0.5% but said it viewed SA’s fiscal and institutional strength as “high”.

It warned, however, that it would downgrade SA’s rating in the absence of a growth recovery and of fundamental structural reforms, including to SOEs.

Moody’s decision to put the five SOEs on review could see at least one of them downgraded sooner rather than later, and analysts warned yesterday that they could have trouble if they tried to go to the bond market to roll over maturing debt or raise new funding. Those that have been placed on review are Eskom, Sanral, the Land Bank, Industrial Development Corporation (IDC) and Development Bank of SA (DBSA).

The Moody’s action had little effect on Thursday on the pricing of their bonds, many of which do not trade often.

However, Rand Merchant Bank credit analyst Elena Ilkova said their market access could be tested if they had to go to the market to raise funding under the threat of a downgrade.

The Land Bank, IDC and DBSA have a combined almost R2.4bn of bonds maturing before the end of this year and Ilkova said if they wanted to tap

It would downgrade SA’s rating in the absence of a growth recovery

the listed bond market to refinance these, they might need an “anchor bid” by the Public Investment Corporation, which holds more than three quarters of all SOE debt.

In its report on the five SOEs, Moody’s expressed concerns about “funding and liquidity risks stemming from increased market concerns over the governance and oversight of SOEs”. It said the five were singled out because of the weakness of their standalone credit profiles, dependence on “sizeable uplift” from government for their ratings and high reliance on market funding. The agency specifically expressed concerns about other lending institutions, following the lead of Futuregrowth, whose Andrew Canter went public last week on its decision not to lend to six SOEs.

Deputy President Cyril Ramaphosa promised in Parliament recently that there would soon be reforms to SOEs, while Treasury deputy director-general Anthony Julies told a tax conference last week the finance minister would announce a package of reforms in next month’s budget to reassure ratings agencies.