Budget 2022

SA may lose Moody’s stable outlook. But it’s a close call

Finance Minister Tito Mboweni (Gallo)
Finance Minister Tito Mboweni (Gallo)
Times Live / Esa Alexander/Gallo

South Africa’s tenuous hold on the stable outlook on its sole investment-grade credit rating may slip with Finance Minister Tito Mboweni expected this week to show a marked deterioration in the state of the nation’s finances.

Of the 17 economists in a Bloomberg survey, nine forecast that Moody’s Investors Service will change its outlook on the nation’s credit rating to negative before the end of the year. That’s as billions of rands in bailouts for cash-strapped Eskom will probably push the budget deficit to a decade high and the economy is struggling to gain traction after last year’s recession.

Mboweni will present the medium-term budget policy statement, that outlines plans for the next three years, in Cape Town on October 30, two days before Moody’s is due to reassess South Africa’s rating. The company may end up only issuing a research report without a ratings action, or nothing at all. It didn’t give assessments on the last two scheduled dates.

While the focus will be on the budget and how the government will rein in debt that’s fast approaching 60% of gross domestic product, investors and ratings companies are also looking out for long-awaited structural reforms by President Cyril Ramaphosa’s government. Mboweni is expected to soon release an updated version of his August economic policy paper that proposes a raft of steps to boost economic growth.

Also, investors are waiting for details of plans announced months ago to split Eskom into three operating units and reorganize its R450bn mountain of debt, while the utility still doesn’t have a permanent chief executive officer.

“Moody’s main concern is the direction of structural reform,” said Danelee Masia, an economist at Deutsche Bank. “If delivered, this will help to raise potential growth, and stabilize if not reduce the fiscal gap.”

S&P Global Ratings and Fitch Ratings cut the nation to junk in 2017. Losing the Moody’s investment-grade rating means South Africa will fall out of key debt gauges including the FTSE World Government Bond Index, which according to International Monetary Fund estimates could trigger forced outflows of about R20bn. 

Moody’s said last month that a R128bn three-year package for the power producer will add to state liabilities and widen the deficit. Eskom supplies around 95% of South Africa’s electricity and resumed rolling blackouts this month to avoid a collapse of the grid.

Moody’s will view the weak fiscal metrics as credit negative and the recent resumption in power outages will further weigh on the economic outlook and “raise the prospect of the state having to cough up even more bailout funds,” said William Attwell, the London-based head of sub-Saharan Africa research at DuckerFrontier, an adviser to multinational firms.

Forced Outflows

A negative outlook means the next move on the credit rating may be a downgrade, which would leave South Africa without an investment-grade ranking for the first time in 25 years.

However, it could take as many as 18 months for a ratings move to happen following an outlook change. None of the economists surveyed by Bloomberg see Moody’s taking the country to junk this year and only four of 15 predicted the company will cut South Africa to sub-investment grade in 2020.

“The trajectory of South Africa’s credit ratings will be dependent on the government’s ability to deliver fiscal consolidation and implementation of growth-lifting structural reforms,” said Miyelani Maluleke, a senior economist at Absa.

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