Financial Mail - Investors Monthly
ECONOMY WATCH
With the clock ticking on a potential downgrade of SA’s remaining investment-grade credit rating, the Moody’s Investors Service Sub-Saharan Africa Summit will be one of several closely watched events in September.
This is the 14th annual summit where the agency will share its outlook on SA’s credit landscape over the next 12 to 18 months.
In addition to perspective from the lead sovereign analyst for SA, Lucie Villa, the conference — to be held in Johannesburg on September 10 — will throw a spotlight on economic reforms, corporate liquidity risk and banking sector growth. The impact of digitalisation on banks’ credit profiles will also feature.
There are heightened concerns about Moody’s revising its outlook on SA to negative from stable when it publishes its next report on the sovereign rating in November. The alternative is for the rating to be lowered to subinvestment grade. That will trigger mass portfolio investment outflows as investors not mandated to hold subinvestment grade bonds will have to dump them.
Andrew Canter, chief investment officer of Futuregrowth Asset Management, says: “The heading is that they should have already downgraded us.”
While S&P Global Ratings and Fitch Ratings downgraded SA into junk status in 2017, Moody’s has given SA the benefit of the doubt.
But Canter suggests that on the back of recent stern statements from Moody’s about
challenges that face the fiscus after a massive bailout for bankrupt Eskom, the agency’s patience is seemingly wearing thin. Moody’s is possibly “not seeing a lot of good signs. Economic growth is still very low.”
Domestic and international investors have already priced in much of the bad news related to a downgrade so that when it happens it won’t be a surprise, Canter says.
Nick Smith-Saville, global head of credit research at Debtwire, says it’s vital to take steps to deal with Eskom soon. “Purely handing out financial support without the cost, operational and governance issues being addressed will not aid the utility and will to place the government at more risk.”
The National Treasury increased its bond issuance in August to raise money for Eskom.
SA is among several SubSaharan countries Moody’s flagged in a report published in August about sovereign debt in the region. These countries are now more vulnerable to shocks and negative financing than five years ago. The agency expected debt of governments in the region to stabilise as some countries attempt fiscal consolidation, but the debt is still higher than half a decade ago. These governments have less capacity to apply countercyclical fiscal policy to absorb future shocks.
But global growth is also slowing, Moody’s cautions in the report. It adds there may be a “possible negative impact on some commodity prices, [while] fragile investor confidence threatens to raise sharply the cost of already much less affordable debt for some sovereigns”.
Namibia, Mauritius, SA and Ghana are the countries with the most constrained spending flexibility as mandatory spending accounts for 80% of total expenditure. High public sector wage bills crimp spending flexibility in SA and Namibia.
“While spending flexibility does not solely drive our assessments of fiscal strength, greater flexibility raises confidence in the stability of fiscal strength through economic and financing cycles,” Moody’s says.
But it says SA’s long average debt maturity and limited foreign currency-denominated debt “offset the immediate credit risk related to rigid expenditure”.
September 2 will be the first sitting of monthly committee gatherings chaired by President Cyril Ramaphosa on implementing the resolutions of the 2018 presidential jobs summit.
The meetings are expected to bring resolution to bottlenecks such as with visas and tourism and water licensing.
SA will also host the World Economic Forum (WEF) on Africa from September 4 to 6 in Cape Town, under the theme “Shaping inclusive growth and shared futures in the fourth industrial revolution”.
Growth in Sub-Saharan Africa is expected to accelerate this year to an average of 3.6% from 3.1% last year.
More than 1,000 regional and global leaders from politics, business, civil society and academia are expected to convene for the summit.
Key issues that will be discussed include the AU’s Agenda 2063 regional strategic priorities.
Trade, readiness for the fourth industrial revolution, leadership and institutional governance will be focus areas, as will challenges facing key sectors such as mining, banking and capital markets and health.
Ramaphosa will lead a delegation of 12 cabinet ministers to WEF Africa. They include public enterprises minister Pravin Gordhan, health minister Zweli Mkhize, transport minister Fikile Mbalula and trade & industry minister Ebrahim Patel. ●