SA ratings rescue plan a ‘herculean’ task – analysts

RATINGS agency Moody’s decision late on Tuesday to place the country’s credit rating on review for a downgrade over its worsening growth prospects have already spiked risks with one analyst calling the National Treasury’s rescue attempts a “herculean” task.

Another analyst said a downgrade could provide a much needed element of certainty that would be good news for the rand and the markets once things had settled down.

Moody’s Investors Service (Moody’s) has placed South Africa’s long and short term ratings of “Baa2” and “P-2” respectively, on review for possible downgrade.

Moody’s visits South Africa next week to assess the economy and decide whether to alter its Baa2 rating, possibly to “junk status”.

A downgrade to junk status would make it more difficult for the country to borrow money and will deter investment.

If Moody’s downgrades South Africa’s status it will be on a par with other ratings agencies which have already placed the country one notch above junk.

The agency will assess the views of various stakeholders in the government, civil society, labour and in the private sector on whether the decline in the economic strength will be reversed in the medium term.

Also whether sufficient progress can be made to stabilise and restore fiscal strength and if policy is likely to lead to a reversal in the continuing erosion of the government’s balance sheet, among other pressing issues.

DA spokesman on finance David Maynier said Moody’s downgrade review decision was prompted by a negative assessment of prospects for economic growth and commitment to fiscal consolidation.

Finance Minister Pravin Gordhan told Radio 702 yesterday that the country had a good story to tell Moody’s.

But analysts at Nedbank Capital said: “Comments from Moody’s overnight have spiked the riskoff trade with bonds and currencies taking a beating overnight.”

Standard Bank chief economist and global head of research Goolam Ballim described the task facing the Treasury and other organisations and individuals interested in heading off a downgrade as “herculean”.

Ballim also said the Treasury was not alone in trying to find a solution to a downgrade.

“Numerous societal groups have taken to deep reflection and are now in the throes of a constructive and credible response.

“The National Treasury, along with the business community, are coalescing around a growth recovery programme, underpinned for a commitment to fiscal probity and broader economic reforms.

“Of course, the tasks are herculean, and will require political will, especially, from the most senior of citizens.”

Institute of Race Relations chief economist Ian Cruickshanks said the chances of staving off a downgrade at this stage were “50/50”.

“For example fundamental data such as the Business Confidence Index, which has ranged between 30 percent and 89 percent over the last decade is now running at 36 percent.

“So we don’t expect much job or economic growth.”

He added that the country had developed a “credibility gap” as far as certain development plans went.

Efficient Group chief economist Dawie Roodt said the only real issue facing Moody’s and other agencies was the chance for economic growth.

“Is this economy going to grow? I’m afraid it is not.

“I predict growth will only be about half-a-percent with a recession possible.”

He said it was possible the agency would only downgrade the ratings by one point which would not have a great affect on the markets but a drop of two points to “junk” would have serious consequences.

However, he believes that a final decision to downgrade could provide certainty and be a good thing for the currency and various markets once the initial shock was over.

The Treasury said in a statement that the “review visit will primarily serve to either affirm the current ratings or downgrade them”.

Moody’s cited weak economic performance as a risk factor when assigning a negative outlook to the rating in December, and said it now expected the economy to grow at only 0.5 percent this year, slower than Treasury’s forecast of 0.9 percent.

Gordhan is now in the US, leading a Team South Africa lobby to persuade ratings agencies that the country is an investment-grade destination and investors to put more money here.

He was in London for two days, meeting investors and the three ratings agencies, explaining the country’s budget and outlook.

Yesterday he was in Boston, but he is heading to New York for more discussions.

Gordhan reportedly said Moody’s informed him of their decision during his stop in London on the overseas roadshow to meet with investors and convince them the economy could be turned around.

“They will be in South Africa and meet with various stakeholders and get relevant information that will influence them either not to downgrade us or not to downgrade us,” Gordhan said.

He added that South Africa had a good story to tell Moody's.

“Clearly we need to prove to ourselves and to them that we are capable of working together to grow our economy, create jobs and make our fiscal framework a viable one,” Gordhan said.

The Treasury plans to inform Moody’s of measures adopted in the 2016 budget to accelerate fiscal consolidation and to give effect to the National Development Plan, about the accelerated implementation of our R870 billion infrastructure investment programme and the steps taken to reinforce stable industrial relations among other steps.

However the rand, already on the back foot after Tuesday data showed the current account deficit widened sharply, saw a modest sell-off after Moody’s said it was concerned about the ability of government policies to restore fiscal strength and boost growth.

Government bonds weakened as well, with the benchmark issue due in 2026 adding 3 basis points to 9.315 percent in the early morning.