There are reasons for Moody’s to consider pressing the pause button
SA will hope to minimise bad news as ratings agency’s decision on downgrade coincides with start of lockdown
SInvestors A took a major Service decision’ on SA s affecting its economy this week: a drastic 21-day lockdown from Friday to deal with Covid-19. The next important event immediately affecting SA’s economic future will be the decision by Moody ’ s investment rating, due later on Friday.
Some may think whatever Moody’s decides is now peripheral to the main economic challenges faced by SA, but the outcome cannot be completely detached from the unfolding wider scheme of things. SA must hope to minimise bad news wherever possible.
What are we up against? It will clearly take time before the effect of Covid-19 can be fully assessed, but it is already obvious that the world economy and SA are experiencing an unprecedented shock, exceeding the 2008 Great Recession. The parameters of action and response have fundamentally shifted for all decisionmakers, whether individual or institutional.
The first line of defence has been appropriate national policy in the health, monetary and fiscal spheres, as well as specifically targeted measures for distressed sectors and vulnerable groups. The exact mix and effect of policy measures taken by various countries depend on the circumstances of each country, and how rapidly they have responded to the onset of the pandemic. They have also shaped the levels of confidence displayed by nations in the steps taken by their governments.
The second is a widespread recognition by various international bodies to provide support to nations economically distressed by what has happened and give them assistance. The IMF has already offered help to more than 50 countries and there is general acknowledgement globally that these are unprecedented times for developed and developing countries alike.
Against this dramatically changing economic background with its turmoil and volatility, what should the Moody’s decision now be on SA’s investment rating? Of course, the ratings agency may well have already decided not to make any further announcement about SA at this stage, in which case these arguments fall away. It obviously always remains Moody’s call. But the consensus up until recently was that if the markers Moody’s outlined were studied, a downgrade was likely.
There was growing evidence that, given the ratings agency’s recently reduced outlook for SA from stable to negative, its scepticism about the effect of the latest budget and cutting its SA 2020 growth forecast to 0.4%, the omens were not good. Though the most optimistic of the ratings agencies about SA, Moody’s was increasingly considered to be running out of patience. Its reports were becoming more critical, and it was not expected to continue giving SA the benefit of the doubt.
On the other hand, it has been argued that recent negative statements from Moody’s have already been priced in by the markets. Perhaps so, but that does not mean SA would not benefit from further breathing space. The Moody’s rating matters, because in the event of it joining S&P Global Ratings and Fitch in downgrading SA to subinvestment level, this would put the domestic economy into universal junk status, with negative consequences for financial markets.
First prize remains for SA to retain a general positive global investment rating to ensure access to certain foreign loan facilities and enjoy lower borrowing costs. While some in SA may well feel we can shrug off whatever Moody’s decides now, having bigger issues to cope with as a result of Covid-19, universal junk status usually takes years to reverse. It cannot be switched on and off like an electric light.
When SA eventually emerges from the Covid19 lockdown and seeks economic recovery, it does not need an additional millstone around its neck. All economies will require time to deal with the aftermath of the pandemic. The reasons for Moody’s to consider pressing the “pause” button therefore stem from the following:
● There is much heightened uncertainty and volatility all round as to the economic cost once Covid-19 has run its course. Economic forecasts are constantly revised in all countries, including SA, as a result of this huge exogenous factor. Key statistics like growth rates, unemployment levels, debt ratios and market indices have all become highly volatile. More time is needed to see where major economic indices will settle.
● As a developing nation SA has shown itself to be capable of good leadership and a willingness to take necessary, immediate steps to implement mitigation and other control measures to cope with Covid-19 as an urgent health and economic challenge. Lives and livelihoods are at stake. This has been reinforced by President Cyril Ramaphosa’s decisive action around the 21-day lockdown, which has enjoyed wide support.
● There is a growing recognition that tough choices have to be made to reprioritise state spending, such as devoting fewer resources to dysfunctional state-owned enterprises and public sector wage increases, and more on issues like saving small business and jobs. SA may need to spend up to 10% of GDP if a worst-case scenario of the socioeconomic consequences of Covid-19 materialises. Fortunately, many of the policies and projects intended to protect the GDP from Covid19 converge with the pro-growth policies to which the government is already committed.
The Moody’s decision will not make or break SA’s economic future. A delay would simply be a helpful acknowledgement of the unusual circumstances in which the world and SA find themselves, and provide time to reassess. The Sword of Damocles would still be there. In these abnormal and volatile conditions the Moody’s decision should therefore not be based on technicalities but on what is the right judgment call in this situation.