Stiglitz, markets shrug off Moody’s downgrade

Jammine said SA was now rated on the same level as other Brics countries — Brazil, India and Russia — so the rand’s 1% fall against the dollar on Friday was a coincidence as the dollar gained against most currencies.

Professor Joseph Stiglitz, a Nobel prize winner for economics who was in South Africa this week, said the ratings downgrade itself was not a big worry.

“Ratings agencies have a terrible record, so I don’t put much weight on what they say.”

But Stiglitz said a bigger concern would be if policymakers reacted to this by making the wrong choices — like hiking in- terest rates, which would hurt SA’s already anaemic growth.

“What would worry me is that this [downgrade] will be used as an argument for a tightening in interest rates and imposing austerity rates in South Africa that would slow growth even more.”

Stiglitz has been outspoken about the need for South Africa to abandon its focus on using interest rates to control inflation, and instead focus on “intervening” to stabilise the exchange rate. “If you were to get a stable and competitive exchange rate, you would wind up with a lower overall interest rate, which would encourage domestic investment and more competitive [exports] that would encourage growth,” he said.

The Moody’s downgrade followed Standard & Poor’s, which cut the country’s rating to BBBwith a stable outlook in June.

Jammine said the Moody’s downgrade was entirely expected, given Finance Minister Nhlanhla Nene’s admission last month that growth would be 1.4% this year rather than 2.7%.

“I’m actually quite relieved. I was fully expecting it because the Moody’s credit rating was two notches higher than that of Standard & Poor’s,” he said.

Investors seemed to agree as the JSE’s All Share index climbed 1% to 50 079 points — gaining for the first time in days.

Jammine said that, given the lower growth rate along with the crippling strikes and Eskom’s power restrictions, the downgrade was a “no-brainer”.

Annabel Bishop, an economist at Investec, released a note on Friday pointing out that Moody’s rating now aligned with Fitch’s, although Fitch has a negative outlook and could downgrade SA again next month.

Bishop said the reasons Moody’s gave for the downgrade — poor economic fundamentals, the decrease in economic and fiscal strength and a weakening debt profile — meant the market had not been caught unawares.

She said the central bank could not afford to lift rates by more than 75 basis points this year — and might raise rates by only 25 basis points next month.

The other major problem looks likely to be labour relations, which saw South Africa rank the worst out of 148 countries in the World Economic Forum’s recent competitiveness report

Said Jammine: “Nene already said he’s going to increase taxes in [next] year’s budget, and he has to control government expenditure, which means denying the workers in the public sector a particularly large wage increase. That’s going to have to be very strict.”