Budget 2021

Ratings agencies adopt 'wait-and-see' approach, as SA teeters on junk knife-edge

Ratings agencies have not changed SA's sovereign credit rating since Finance Minister Tito Mboweni presented the Budget on Wednesday, as economists expect they may wait until the outcome of the elections in May to make any decisions. 

Moody's, the only ratings agency which still has SA's debt ranked at investment grade (Baa3 with a stable outlook), issued a post-Budget comment in which it highlighted the further erosion of SA's fiscal strength. The agency also again pinpointed debt-laden power utility Eskom as a major risk to the fiscus.

The commentary did not constitute a ratings action. Moody's is scheduled to announce whether it will update, downgrade or keep SA's ratings unchanged in March, but may also hold off until after the election. 

Were Moody's to downgrade SA to junk status, the country will be removed from the major Citi World Government Bond Index, triggering a major sell-off of SA bonds. The cost of borrowing will be much higher.

Fitch and Standard & Poor's, meanwhile, both have SA rated at BB+, the first rung of sub-investment grade, back in 2017. 

In a short comment on the budget, S&P said it would await "further clarity on the suport package and tariffs" for Eskom when it considers changing its rating for the power utility - which is currently at CCC+, deep into sub-investment grade.

In its report on the budget, meanwhile, Fitch said the government's upward debt trajectory and contingent liabilities continue to be weaknesses for the sovereign rating. It also said the financial support to Eskom had a limited effect on the country's credit profile.

Fitch added that it would be following the development of fiscal policy leading up to the May elections to inform its ratings decision.

What the locals say 

Johann Els, chief economist at Old Mutual Investment Group, says he does not expect rating agencies to change their outlooks in the short term. "They will likely adopt a wait-and-see attitude until after the elections," he said.

Momentum Investments economist Sanisha Packirisamy and Herman van Papendorp, head of investment research and asset allocation, similarly believe the agencies would rather wait to see how state-owned enterprises, particularly Eskom, implement turnaround strategies. 

"Despite government’s upwardly revised expenditure ceiling, wider fiscal deficit and higher debt ratio, its ongoing commitment to fiscal consolidation in the medium term and conditional nature of its guarantees to the troubled parastatals could stave off a downgrade in the sovereign rating," they said.

Momentum investments expects the Moody's outlook to be downgraded to negative in March.

Nazmeera Moola, deputy managing director of Investec Asset Management, believes a "more plausible" plan on Eskom's turnaround is needed to prevent Moody's from moving the outlook to negative.

"Moody’s noted after the State of the Nation Address that the SA government taking on Eskom liabilities would only be viewed as neutral if it were accompanied by an immediate cost-reduction plan that could be implemented imminently. This needs to be produced," she said.

Maarten Ackerman, Citadel chief economist, said that the fact that government is not taking on Eskom debt can be viewed positively. 

Mboweni was adamant that the government would not take on any of Eskom's debt during his Budget address on Wednesday.

"I want to make it clear: the national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it," he said. 

Pushing the limits

Ackerman said there was still a risk of a downgrade, however. "A fiscal deficit of 4.5% and a debt-to-GDP ratio of 60.2% is really pushing the limits," said Ackerman. "Both of these numbers are in the red zone as far as the ratings agencies are concerned, and if we make one misstep, we would be very close to a downgrade."

He added that the 1.5% GDP growth forecast was realistic, but if it did not materialise, then the deficit and debt projections could be even worse, which would add to a risk of a downgrade.

The RMB global markets research team views the deterioration of SA's financial ratios compared to the mini budget to be credit negative. Treasury expects gross debt to GDP to stabilise at 60.2% of GDP by 2023/24 and net debt stabilising at 57.3% of GDP.  

Last year, debt was expected to stabilise at 53.2% in 2023/24.

The team said it was possible Moody's would not downgrade the outlook to negative, provided Eskom's turnaround plan was credible, and if tariff increases led to long-term revenue growth.

"The threat, however, of a rating downgrade has not dissipated. It has merely moved to later in 2019 or early 2020," the team warned.

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