Moody’s may downgrade SA in coming weeks - economist

Cape Town – Moody’s rating agency, which has South Africa at the second-lowest investment grade level, may downgrade the country by one notch in coming weeks without visiting it first, according to Nomura economist Peter Attard Montalto.

“There now seems to be some possibility, which we had previously underplayed, that Moody’s may downgrade in coming weeks without a visit,” he said in a market note on Tuesday.

“The original view was it would visit sometime towards the end of May and then report mid-June before its July 3 window deadline. This would take the market by surprise probably (the timing, not the move). The consensus seems to still be a one-notch downgrade, maintaining negative watch.

“Our original view of S&P downgrading South Africa’s local ratings to junk this year remains, but our previous view on the likelihood of it happening in its June 2 update seems a little early now (especially with the pushing back on the timing on the no confidence vote), so we shift our view more towards its year-end update on November 24 after the (mini budget)."

S&P already downgraded South Africa's foreign ratings to junk status in April, while Moody’s placed it on downgrade review on April 4 and Fitch downgraded both foreign and local ratings to junk status in April.

"We think the governor’s intervention last week on Bloomberg TV – to criticise markets’ excessive focus on rate cuts – is the start of a more aggressive push back on ‘it’s obvious it is going to cut /it has to cut’ market mind-set (of locals especially)."

Moody's said President Jacob Zuma's massive Cabinet reshuffle shortly after midnight on March 30, which claimed the jobs of former finance minister Pravin Gordhan and his deputy Mcebisi Jonas, raised questions about progress on reforms previously identified as essential to sustain South Africa's fiscal and economic strength, and the effectiveness of South Africa's policy-making institutions.

It also raised questions about the more immediate implications for growth and public debt given the potentially negative impact on fragile domestic and external investor confidence, Moody's said.

"The review will allow Moody's to assess these risks, and if the changes in leadership signal a weakening in the country's institutional, economic and fiscal strength."

Montalto’s view comes after Bloomberg reported on May 2 that representatives from Moody’s plan to visit the country in coming weeks to review its ratings.

Bloomberg also quoted the SA Reserve Bank as saying that a further deterioration in ratings may lead to capital outflows, cause funding costs to increase and reduce credit available for businesses.

The severity will depend on the extent to which further downgrades are already priced in, it noted.

“Further downgrades on the local currency rating could trigger high levels of selling off of bonds by foreign investors, which could also result in marked currency depreciation,” the Reserve Bank said.

Finance Minister Malusi Gigaba said there are no silver bullets or guarantees that will stop Moody’s from downgrading South Africa in the coming weeks, but government is engaging directly with the ratings agency, assuring it of the country's commitment to fiscal discipline and consolidation.

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