Eskom still concerns Moody’s despite reprieve

Johannesburg- Improvements to state-owned enterprises (SOEs), reducing government guarantees in the form of contingent liabilities and debt stabilisation will improve South Africa’s credit rating, according to Moody’s Investor Services.

The ratings agency on Friday affirmed SA at ‘Baa3’, one notch above sub-investment grade or junk status, but changed the outlook to stable, from negative, citing political changes, improved growth levels and debt reduction measures taken by government.

Moody’s said in considering moving the country up its rankings, it would also look at reform measures taken in resolving issues in the mining and agricultural sectors when it reviews the country again in October or November.

The institution could consider placing SA back on a negative outlook or review for a downgrade if government’s “commitment to, or capacity to engineer revived growth and debt stabilisation were to falter”.

Moody’s - which expects the debt to gross domestic product (GDP) ratio to stabilise at 55% of GDP between 2018 and 2020 - warned that negative developments in fiscal policy will have an impact on its future ratings, including “still fragile” SOEs drawing down further on government debt, with particular reference to Eskom.

“Significant uncertainties remain and risks are tilted to the upside. Over the near-term, the departmental cuts required to support (inter alia) the increased spending on education announced under the previous presidency will test policymakers and administrators alike,” the rating review commented.

Strength of institutions
 
Nazmeera Moola, co-head of fixed income at Investec Asset Management, said historically Moody’s has always rated SA higher than other major ratings agencies because of the strength of the country’s institutions.

“We saw the undermining of that framework over the last seven or eight years,” Moola told Fin24 on Saturday.
 
Moola said over the long-term, ratings agencies look at the drivers of economic growth in their assessment of the sovereign (country) rating.

Standard & Poor’s is expected to rate the country in May, after downgrading SA's long-term local currency rating to 'BB+' (or junk) from 'BBB-' with a stable outlook, in November.

Moola said the first step to moving back to investment grade by S&P would be to move from stable to a positive outlook.

This could happen in May if businesses talk about increased investment, according to Moola. She said in the best-case scenario, S&P could move SA back to investment grade within 18 months.

Fitch, the third of the major ratings agencies, which also downgraded SA to sub-investment grade in 2017, does not announce reviews ahead of time.

Nothing has changed

While business organisations, Treasury and political parties broadly welcomed the reprieve by Moody’s, chartered accountant and commentator Khaya Sithole was more sceptical, saying the financial position of the country hasn’t improved since Moody’s placed SA on a 90-day review for a downgrade in November.

“We haven’t seen any fundamental restructuring in the last 90 days. Eskom doesn’t even have an executive, it has an acting CEO, the balance sheet of Eskom is as bad as it was 90 days ago, Sithole said.

Sithole added that ratings agencies worked on “perception and sentiment” and Moody’s thumbs up to President Cyril Ramaphosa's administration is a “pragmatic” stance as he’s easier to engage with than his predecessor, former president Jacob Zuma.

On Moody’s adopting a wait-and-see approach to land expropriation without compensation, Sithole said the ratings agency doesn’t expect the policy to be fully implemented.

“It indicated Moody’s reads the SA constitution better than the ANC. The ANC has no intention to amend the constitution and it’s engaged in a PR exercise,” said Sithole.

The ANC resolved at its 54th National Conference in December to expropriate land without compensation, but with the caveat that the policy can’t impact food security or the economy as a whole.

“Moody’s has seen that the economically productive parts of the land will be insulated,” Sithole said.

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