Ramaphosa gets Moody’s backing
• Agency awaits planned reforms
Moody’s Investors Service has given President Cyril Ramaphosa the benefit of the doubt but the clock is ticking for the implementation of his promised structural reforms if a later downgrade is to be avoided.
The credit ratings agency did not release a scheduled report on SA’s sovereign credit rating on Friday. SA’s debt is rated at Baa3 by the agency, one notch above junk status, with a stable outlook. Moody’s has two scheduled review dates a year but is under no obligation to issue a report.
With less than six weeks to go until the elections, analysts said Moody’s had figured it was too soon to decide whether Ramaphosa would be able to take the hard decisions necessary to turn the economy around. Structural reforms include: splitting Eskom into three entities and creating an independent systems operator; rebalancing public finances towards investment; and reform of state-owned enterprises.
“They’ve stipulated quite adamantly that while they have two scheduled dates, they don’t have to stick to them if they don’t deem it necessary,” BNP Paribas economist Jeff Schultz said.
Moody’s is the only major ratings agency that has not already lowered SA’s sovereign debt to subinvestment grade. A downgrade of the rating would be disastrous for SA as it would cause large capital outflows by investors who are compelled to invest only in investment grade entities and because it would raise the cost of borrowing across the economy.
Fitch Ratings and S&P lowered SA’s sovereign debt to below investment grade in 2017, in response to a surprise cabinet reshuffle by then president Jacob Zuma. In March 2018, a change in leadership prompted Moody’s to change its outlook from negative to stable.
“Moody’s wants to give the political administration under Ramaphosa the room to implement structural reforms. They have a two-year period to act on their outlook and we’re only 12 months in. They’ll look at the outcome of the election and what reforms can be pushed through,” Schultz said.
Nazmeera Moola, co-head of fixed investment at Investec, agreed that Moody’s might have thought it was too soon to move.
One of two things would occur, she said.
“Either Ramaphosa takes the election strongly, moves forward and is able to implement reforms, or SA remains stuck where it is with the ANC torn between various interest groups. The latter is not sustainable and the fiscal metrics will deteriorate. Then, I think we will see a change in the outlook, perhaps in November, and a downgrade ... after that.”
Arthur Kamp, chief economist at Sanlam Investments,
said although there had been some deterioration in the growth outlook and public finances over the past six months, on Moody’s own methodology not enough had changed to warrant a ratings action.
“Because SA’s government debt is mostly rand-denominated and the country has deep and liquid capital markets, it is very unlikely SA will default. That helps us quite a lot.”
The fact that the government had stepped in to provide direct support to Eskom in the form of R23bn a year for the next decade would also have been viewed as positive, Kamp said.
“SA ought to take this as an opportunity to get its fiscal house in order and its policies aligned to a pro-growth and confidence-inspiring economic strategy,” CEO of Business Unity SA Tanya Cohen said.
The government, alongside business, needs to focus on political stability, policy certainty, the reform of state-owned entities, structural reform and a credible growth roadmap to stave off another downgrade, Cohen said.
“Particular attention needs to be given to rectifying the deterioration in the country’s fiscal position that was communicated in the budget speech [in February]”, said Jabu Mabuza, co-convenor of the CEO Initiative. The next ratings calendar date will be on November 1, after the medium-term budget policy statement at the end of October.
“The economy is not yet out of the woods and Moody’s decision should be seen as a stay of execution, rather than as a reprieve,” North West University Business School economist Raymond Parsons said.
While the move to hold off on making a rating announcement is within Moody’s mandate, it creates uncertainty in the market, economist Thabi Leoka said. “The expectation of an announcement, however, will send jitters to the market. They have to come back and make a pronouncement at some point,” she said.