Moody’s stay of execution gives SA a chance

Was it a stay of execution or a reprieve for SA? North West University Business School economist Raymond Parsons figured it was the former.

He was responding to the non-event that was Moody’s Investors Service’s review of SA’s credit rating scheduled for Friday, keeping many an analyst awake well into the second hour of Saturday.

In the end Moody’s, which was widely expected to change its outlook from stable to negative, chose to do nothing. It did not give a reason for staying put, leading people to speculate.

Some have said it didn’t want to risk making such a big move with elections on the horizon. That’s odd. When is there ever not a big event on the cards in SA? What do they think could happen on May 8 to enable them to make a simple call on whether the country can repay its debt that they can’t make now?

Markets might give us an indication of how significant, or not, the non-action is when they open on Monday.

The last time Moody’s sat on the sidelines instead of delivering a planned review, on October 15 2018, the rand jumped about 2.5% against the dollar over the following two trading days, while yields — which move inversely to the price — on the country’s benchmark 10-year bonds fell by 10 basis points or 0.1 of a percentage point.

Ratings companies tend to draw polarised reactions, either from those who dismiss them as an irrelevance that policy makers pay too much attention to, or fans who see them as high priests whose pronouncements can make or break economies.

Of course their credibility took a big hit after the outbreak of the global financial crisis a decade ago. They stood accused of giving their top rating, AAA, to dodgy instruments that almost brought down the whole financial system.

Ratings companies’ mistakes were also blamed for contributing to the debt crisis that engulfed Europe after government bailouts of commercial banks led to a sharp deterioration of their creditworthiness, which was exacerbated as economies slipped into recessions. And markets seemed to increasingly ignore them.

In what was described as an unprecedented blow to the world’s largest economy, Standard & Poor’s stripped the US of the top-notch AAA rating, which it had held since 1941. It didn’t turn out to be such a blow for the US and didn’t stop Treasuries from retaining their status as the world’s safest assets. Yields duly went to record lows as investors sought safe havens from the worsening global financial crisis.

While the argument could be made that the US, as a printer of the world’s reserve currency, was a special case, this was also seen in some European countries one would struggle to describe as havens.

France saw its borrowing costs drop to record levels after it lost its top rating in 2012. It was the same for the UK when it was downgraded in the wake of the June 2016 Brexit vote, showing investors had no concerns about lending money to the UK government.

Even Spain and Italy, seen as the next weakest links in the region after the likes of Greece and Portugal, saw their yields drop, no matter what the ratings companies said about their fiscal health. At some point Spain didn’t even have a government, yet investors kept snapping up its bonds.

It’s possible, then, to look at these events and wonder if we assign too much power to credit companies, even though the people who make actual decisions about what to do with their clients’ money seemingly don’t think much of them.

That might be a mistake. Unlike Italy or Spain, there’s no European Central Bank here creating artificial demand for our bonds by cutting interest rates, or buying them in a process known as quantitative easing. And moving from AAA to AA+, as happened to the US in August 2011, is hardly comparable to moving from investment grade to junk, which is the fate that awaits SA should Moody’s eventually make that move later in 2019.

After the monetary policy committee decided to keep interest rates unchanged last week, Reserve Bank deputy governor Daniel Mminele said it was unlikely that a downgrade would have been fully priced in already, noting that indextracking investors would probably wait before making their own move.

Some have argued that as much as R100bn could be pulled out if SA falls out of key gauges such as Citigroup’s World Government Bond index. That would push up bond yields as investors demand a higher premium for holding SA assets. Which matters because it means less money for schools and hospitals.

Whether it’s a stay of execution or reprieve, one can only hope that President Cyril Ramaphosa, unlike his deputy, is not dismissive of his finance minister’s call for economic reforms and uses it wisely.

THE LAST TIME MOODY’S SAT ON THE SIDELINES INSTEAD OF DELIVERING A PLANNED REVIEW, THE RAND JUMPED 2.5% AGAINST THE DOLLAR OVER THE NEXT TWO DAYS