SA will not be able to dodge a credit rating downgrade from Moody’s this year, because the changes it has promised to make are difficult, and it’s not even displaying a concerted effort to achieve them, Alexander Forbes chief economist Isaah Mhlanga said on Thursday.
The country’s largest pension fund administrator, which held an investment and economic outlook roundtable on Thursday morning, has always adopted an optimistic view of SA’s prospects.
CEO Dawie de Villiers often argues that with few positive tweaks, the local economy can take off.
But Mhlanga adopted a more cautious stance this week, saying that Moody’s – the only one of the big three rating agencies that still has SA on an investment grade – will likely downgrade the country this year. SA has escaped a downgrade a few times when local economists predicted a downgrade in the past. But this time, given that the agency put SA on a negative outlook in November, there is little room to wriggle out of becoming another junk country, especially because not much has become of the promises the finance minister made in the medium-term budget last year. Moody’s is scheduled to review SA’s credit rating in March.
"We expect a credit rating downgrade from Moody’s this year because the pace of structural reforms which are required to lift growth has been too slow. Nothing much can be done between now and February to give a strong indication that reforms are going to come through," said Mhlanga.
He said National Treasury has completely lost fiscal credibility at this point because it failed to meet its own targets on key areas including growth forecast, fiscal deficit and level of government debt. For instance, latest estimates indicate that GDP growth stood at 0.4% in 2019, whereas Treasury had targeted 1.5% in the February budget speech, before revising this to 0.5% in the medium-term budget.
Combined with the large-scale changes Treasury said it would make before Moody’s last rating review, this means the agency might not be convinced that SA will deliver what it promised in 18 months' time. Mhlanga said Moody’s usually gives countries 18 months to deliver the changes they promised after putting them on negative outlook.
Mhlanga said it had become doubtful whether Treasury would be able to cut expenditure by R150bn in the next three years, as it promised. "What is required to cut is current spending, a bulk of which is salaries and wages. The strength of our unions may prevent that. We’ve already seen how unions responded to Telkom’s suggestion that they want to cut 3 000 jobs," added Mhlanga.
Not all is doom and gloom
But Mhlanga said because SA’s possible downgrade to junk has already been priced into the market; i.e – SA’s borrowing costs have already increased to levels similar to those of some sub-invest grade countries – a downgrade shouldn’t trigger a massive sell-off of local assets.
"But that said, the macroeconomic adjustment tends to be painful and takes a very long time. Many countries that have been downgraded to sub-investment grade since 1990. On average it takes about six to seven years to regain investment grade," he said.
Alexander Forbes’ chief investment officer, Gyongyi King, said what usually happens when a country is downgraded to junk is that investment managers who are only allowed to put money in investment-grade economies leave. But at the same time, investors who are looking for higher returns move in.