Rating outlook is evenly balanced

Moody’s analysts change prospects to stable

THE RISKS of another credit downgrade on South Africa’s rating were evenly balanced with those for an upgrade, a senior Moody’s analyst said yesterday.

The agency downgraded South Africa’s economy to Baa2 from Baa1 in November, citing poor prospects for medium-term growth and rising public debt, but changed its outlook to stable from negative.

“We don’t think it’s more likely to be downgraded. We think the risks are evenly balanced and that’s why we have a stable outlook,” Moody’s analyst Kristin Lindow said on the sidelines of a conference in Johannesburg.

“That said, having just been downgraded, we don’t think it’s very likely that the country would be upgraded again.”

Pressured

Turning to interest rates, Lindow said South African policymakers might be pressured to raise interest rates as the US Federal Reserve moves to tighten monetary policy in September.

“The reaction of interest rates may be more towards the US Fed moves,” Lindow said yesterday. “If it were to raise interest rates in September, which now seems to be the consensus for the next date, that would put pressure on South Africa to raise rates as well.”

While the South African central bank’s monetary policy committee (MPC) has kept the benchmark rate unchanged at 5.75 percent since July, deputy governor Daniel Mminele said in April that policymakers had less room to continue keeping borrowing costs on hold.

Speculation that the US will begin scaling back its monetary stimulus contributed to the rand’s weakness since last year as investors reduced their appetite for emerging market assets. The rand was bid at R11.9209 against the dollar at 5pm yesterday, 7.44c weaker than the comparable time on Monday.

The SA Reserve Bank’s MPC raised its inflation forecast for this year in March and said consumer price growth would breach 6 percent in the first quarter of 2016.

Spending ceiling

South Africa’s public wage bill would not pose a risk to government finances if the state remained within its spending ceiling, Lindow said.

That said, increasing the salaries of public servants might also erode the portion the government was able to spend on investment, she said.

Labour unions representing about 1.3 million state workers are currently considering a government offer to raise wages by 7 percent after initially demanding 10 percent.

The state payroll has surged 90 percent to R445.3 billion since 2009 and accounts for almost 36 percent of total government expenditure.

The wage increase “should not by itself mean that there would be a different trajectory for government finances”, Lindow said. “What it could mean is that there’s less money left over for investment.”

Speculation that the US will begin scaling back its monetary stimulus contributed to rand’s weakness.