MOODYS HOLDS BACK ON DOWNGRADE
SA is safe from a credit ratings downgrade by Moody’s Investors Service for the next year
SA is safe from a credit ratings downgrade by Moody’s Investors Service for the next 12 to 18 months, the firm’s lead sovereign analyst for the country, Lucie Villa, told investors.
SA’s sovereign debt has the lowest investment grade by Moody’s, at Baa3 with a stable outlook. Moody’s is the only one of the three major ratings agencies that has not assigned the country junk status.
Its peers downgraded at the height of the financial chaos that characterised Jacob Zuma’s second term as president.
Should Moody’s downgrade, it could raise borrowing costs across the economy and trigger billions of rand in outflows.
It would be highly unusual for the agency to move from a stable outlook to a ratings change in either direction before first signalling a change in the outlook, Villa said.
To avoid a negative rating action down the line, SA’s debt ratios would need to move in the right direction and the government would have to continue to show improvement in the implementation of policies favourable to growth.
Moody’s is expected to issue a report on November 1, after the tabling of the mediumterm budget policy statement by finance minister Tito Mboweni in October.
“The outlook is stable, so that tells you that a change in the rating is not likely in the next 12 to 18 months.
“Key to the future of the rating either to the upside or downside is the trajectory of the debt ratio and the capacity of government to stabilise to higher growth and a lower fiscal deficit,” she said at a media conference at the firm’s annual subSaharan summit in Sandton.
Implying that SA has time to change course, Villa said the key was that the prospects for improvement remained strong if SA was to keep its rating.
“We know that policy implementation will be slow. We never expected a revolutionary U-turn but we expect improvement, and if the prospects for improvement were to fade that is when we would move.”
Despite its rising debt profile, SA’s investment-grade rating has been held up by the composition of debt, which is longdated and mostly rand-denominated, as well as by sufficient foreign reserves.
In its last report on SA, published in June, Moody’s forecast a 5.2% budget deficit for SA, well above the 4.5% that the Treasury had set in February.
However, the fiscus would come under additional pressure from the R128bn support that has been made available to Eskom. If none of the R128bn was absorbed by fiscal measures, such as through expenditure reduction or increased tax revenue, and if tax buoyancy deteriorated further, then the expectation was that the budget deficit would reach 7%, Villa said.
In a presentation of SA’s debt trajectory to the conference, the latter scenario was described as the worst case. In the best case, the additional Eskom support was absorbed, which would result in a 5.2% budget deficit.
However, Moody’s said it was very important to note SA was diverging from the median for countries also rated Baa3, with both the best- and worst-case scenarios significantly above the median and rising.
Moody’s has previously indicated that to ignite growth the government must implement structural reforms in a range of sectors to improve the ease of doing business.
Villa said the government had identified many of the same reforms itself but the problem was implementation.
Two weeks ago, the Treasury published a discussion paper proposing reforms.
“If the suggestions from the paper were implemented, it would be a positive step, but the question is over implementation. It is unclear where the realistic path of implementation is going forward,” she said.