Fiscal stimulus package and Moody’s take centre stage

All eyes this week will be on the ratings review by Moody’s Investors Service scheduled for Friday, but the content of the government’s fiscal stimulus package to soften the effect of the coronavirus outbreak is even more eagerly anticipated.

To ensure the economy does not slide into a prolonged recession, finance minister Tito Mboweni has pledged that funds will be sourced from the disaster management fund and freed up by reprioritising existing government spending.

Stanlib chief economist Kevin Lings expects the government to provide some safety net to households in need, as well as to small and medium enterprises, in addition to providing direct support to affected industries.

The National Treasury has the option of invoking section 16 of the Public Finance Management Act, which would enable it to free up to R39bn (2% of 2020/2021 consolidated expenditure) of emergency funding to counter the outbreak.

However, economists say it is unlikely that the government will mount such a significant response given SA’s precarious fiscal position.

Moody’s is the last big ratings agency to rank SA investment grade (Baa3, negative). If it junks the country’s ratings this week, SA government bonds will be ejected from the World Government Bond Index. This will precipitate forced selling by certain bondholders which, given market volatility, is likely to hit the rand hard.

“The coronavirus shock exposes exactly why SA should be downgraded to junk this week given rising fiscal risk and the continued lack of structural reform, the consequences of which are now playing out,” says Peter Attard Montalto, the head of capital markets research at Intellidex.

“Not only is the shock showing up SA’s vulnerabilities but equally it’s showing up

Moody’s for having endlessly given SA the benefit of the doubt despite the country’s deteriorating fiscal and economic position.”

Even so, he says Moody’s might first place SA under a three-month negative ratings watch before junking the ratings in July.

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Citibank economist Gina Schoeman also says there is a “strong chance” that Moody’s could hold off until the second half of the year, in line with its wait-and-see approach to SA.

She expects Moody’s to be pleased with the Reserve Bank’s 100-basis point rate cut, given its view that monetary policy had become too restrictive. It is likely to welcome the stringent measures SA is taking to tackle Covid-19 from a health and social perspective.

On the other hand, BNP Paribas economist Jeff Schultz says a Moody’s downgrade is “very likely” on Friday given the sharp virus-related deterioration in the growth outlook and the knock-on effect this will have on SA’s debt trajectory.

“The best-case scenario would be for Moody’s to place SA on review for a downgrade until the negative economic and fiscal effect becomes clearer later in the year, though we maintain that a Moody’s downgrade in 2020 is unavoidable,” he says.

On the data front, Schultz expects headline producer price inflation, due out on Thursday, to have moderated to 4.4% year on year in February from 4.6% in January.

“Like consumer inflation, we expect a sharp moderation [in the producer price index] in the following months towards 3% or even below, as a combination of strong fuel price deflation and increasingly weak economic activity and demand weigh on prices,” he says.