INTERVIEW: Treasury DG downplays new rating agency

Cape Town – Treasury director general Lungisa Fuzile believes a new rating agency that is pro-South Africa will have very limited benefits for the country.

His views follow Standard & Poor’s (S&P) decision this week to downgrade South Africa’s sovereign rating to BB+, which is non-investment grade or junk status, and Moody’s decision to place its Baa2 (two notches above junk) ratings of South Africa on downgrade review.

This follows the removal of ANC ministers Pravin Gordhan and Mcebisi Jonas from their roles as political heads of Treasury last week, stoking fears that South Africa will change its tight fiscal policy.

In an exclusive video interview with Fin24 at the Cape Town International Convention Centre on Wednesday, Fuzile – who revealed he resigned and will leave in mid-May – said South Africans “need to be a little more elegant in thinking” about the role of rating agencies.

WATCH: Interview with Treasury director general Lungisa Fuzile

Calls for new rating agency

There have been calls from some ANC politicians for the BRICS (Brazil, Russia, India, China and South Africa) nations to form their own rating agency, to combat the conservative stance of the current agencies.

South Africa’s sovereign bonds will only be officially rated as junk if Fitch or Moody’s downgrades the country to non-investment grade, a move that is likely to occur. South Africa would then join fell BRICS countries Brazil and Russian, which are currently rated as junk by two or more rating agencies.

In his State of the Nation address in 2017, President Jacob Zuma said: “We welcome the Goa BRICS Heads of State and Government decision to establish the BRICS Rating Agency so that we can assist one another in assessing our economic paths.”

Why a new ratings agency won’t work

While he does not believe this is a bad idea, Fuzile said a new rating agency that rates South Africa favourably will not take the country very far.

“It is only when two rating agencies rate you – let’s take for example sub-investment grade (junk status) – that the rating begins to matter,” he explained.

“If you just have one rating agency rating you AAA (above junk) when others are rating you … BBB+ (junk), your debt instruments are not going to be traded on the basis of the one that stands out.

“We would have been better off if we thought about creating our own rating agency when our country’s ratings were improving.

“When you say you will have your own … (rating agency) when others say things that you may not like yourself, it does take something away from the credibility of your idea.”

WATCH: Treasury director general Lungisa Fuzile reveals his resignation plans

What will happen if Fitch and Moody’s strike

Asked what will happen to bond yields and the economy should Fitch and Moody’s strike, Fuzile said: “I hope it doesn’t happen.”

He explained that when two rating agencies downgrade South Africa to junk status, then 10% of South Africa’s bond holders, who are part of the foreign currency denominated component, would have to sell their bonds as part of their portfolio mandate. Not selling could make them technically in breach of their mandate.

“They are given a certain amount of time … to sell the South African bonds that they are holding in their portfolio,” he said. “That triggers a rise in the yield, which means the debt service cost associated with those instruments rise.”

Moving away from foreign debt

When S&P downgraded South Africa, National Treasury reacted, saying: “Reducing reliance on foreign savings to fund investment and relying less on debt to finance public expenditure will secure South Africa’s fiscal sovereignty and economic independence.”

Some economists took this to mean a radical move away from Fitch, S&P and Moody’s, but Fuzile said this was misunderstood.

“As a country, we must raise the level of savings in South Africa, so that at a macro-economic level we can depend less and less on savings from other parts of the world,” he said.

Fuzile said it would not necessary mean a cut in expenditure. “If we cut our suit according to our cloth… then we move close to that.

Best thing for SA is to grow economy

In other words, if South Africa aligns its expenditure to the size of its GDP and the size at which it grows, then it could depend less on debt.  

“If we work hard to achieve a higher and faster rate of growth, then all of a sudden you’ve got a different picture, because (this will see) … your tax base expanding.

“(There will be) more resources available from within the economy.

“We are not irritated that foreign savings are coming here. We are just being cautious (because) the dependence has got advantages and it also has disadvantages.

“We must take steps proactively to ensure that we build the macro-economic strength of our economy,” he said.

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