Moody’s could take dim view on load shedding next week, economists warn

Economists have warned that Moody’s Investors Services could change its outlook from stable to negative or even downgrade South Africa to junk status when it reviews the country’s credit rating next week.

"There’s even an outside chance they could downgrade the country [to junk status]. Although they don’t usually do that, it is a possibility," Chief economist at PricewaterhouseCoopers, Lullu Krugel, told Fin24.

Moody’s is the last of the three major ratings agencies to still hold SA at investment grade of Baa3, one notch above sub-investment grade or junk status, with a stable outlook. 

If Moody’s downgrades SA to sub-investment grade, the country will be removed from the Citi World Government Bond Index. This will force many asset managers and pension funds to sell the SA government bonds they hold and trigger billions of rands in capital outflows.

Terrible timing

The ratings agency is expected to pronounce on SA on Friday, March 29, following several consecutive days of Stage Four load shedding, which Krugel described as "terrible timing".

At a joint media briefing on Tuesday with Eskom and the Department of Public Enterprises, there was no clear indication when the issues would be resolved, and an update was promised in the next 10-14 days, following an investigation into power plant failures by a technical task team.

Krugel said the country had never had so many consecutive days of Stage Four load shedding, which cuts 4 000 MW of power from the national grid. This is"very detrimental to growth", in Krugel's opinion. 

She added that Moody’s in February called for a more detailed plan about Eskom’s forthcoming restructuring, and this has yet to be released publicly by Treasury. At the time, Finance Minister Tito Mboweni announced a R69bn lifeline for the power utility over the next three years.

The Eskom financial rescue package will weigh on SA's fiscal position, increasing the debt to GDP ratio to 60.2% by 2023/24, a key concern for ratings agencies.

'Time has run out'

"They’ve [Moody’s] been very kind to us and I’m worried our time has run out…we will move to a negative outlook if we’re lucky," Krugel said.

Executive chief economist at Alexander Forbes, Isaah Mhlanga, was more optimistic, saying he does not believe Moody’s will downgrade the country to junk status next week.

Mhlanga told Fin24 that economic growth is set to improve to 1.5% in 2018, according to Treasury, and institutional reforms have been undertaken, both of which were key concerns from the ratings agency in previous reviews.

He warned, however, that the agency's decision could be affected by Eskom operational and financial woes, but he added that Moody's would first shift its outlook from stable to negative before deciding on a full downgrade.

There are varying estimates of losses to the economy caused by load shedding. Krugel believes the country is losing R1.7bn every day that Stage Four load shedding is implemented.

Mhlanga said he estimates the economy foregoes R1bn every day of Stage Three rotational power cuts and this could be higher when more energy is cut from the system.

The two other major rating agencies, Standard & Poor’s and Fitch, are expected to review SA in May and June.

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