Moody's: 5 economists on why load shedding may trip up SA's credit rating


Moody's Investors Service, the sole global ratings agency that still has SA's sovereign debt at investment grade, is expected to make an announcement on the country's credit rating on Friday evening. 

And while four out of the five economists Fin24 spoke to ahead of the announcement still expect Moody's to only lower the country's credit rating outlook from stable to negative, the re-emergence of load shedding may have changed things.

Moody's currently has SA's credit rating at Baa3, the last rung of investment grade, with a stable outlook. Rival ratings agencies Fitch and S&P both downgraded SA to sub-investment grade, commonly known as junk status, in 2017. 

Fin24 spoke to five economists about the outlook for SA's credit rating.

Reactions were mixed, but one thing was certain: developments at debt-laden power utility Eskom and the unreliability of electricity supply have dampened past hopes of avoiding a downgrade.

Fin24: Will SA be downgraded to junk status?

Sifiso Skenjana, founder and financial economist at AFRA Consultants: Economic growth has come in slightly lower than previously expected, so I suspect, on balance, Moody’s might change the ratings outlook to negative, but keep ratings unchanged.

Johann Els, Chief Economist of Old Mutual Investment Group: I think Moody's will keep the investment grade rating unchanged. But I think there is more than an even chance that they could change the outlook from stable to negative. That would give Moody's 18 months to decide on the rating itself. They would consider the next mini budget, the national elections and policy reform, which might follow after elections.

Sanisha Packirisamy, economist at MMI Holdings: We are expecting a downgrade in the outlook from stable to negative, but the rating, in our view, is likely to remain unchanged. We expect Moody’s to take a wait-and-see approach to Eskom to review its turnaround strategy and the proposed unbundling model, once more information comes to light.

George Glynos, executive director of research and investments at ETM Analytics: I was firstly in the camp that Moody's would only downgrade the outlook from stable to negative, but that was before the Budget and load shedding. We can expect a full downgrade to junk status.

Maarten Ackerman, chief economist and advisory partner, Citadel: I don’t think we will be downgraded, not right now. The outlook is very likely to change to negative and then there’s an increased risk of being downgraded at the end of the year when they have their next review. That depends on whether we can turn the Eskom situation around.

Will the recent spate of load shedding influence Moody’s decision?

Skenjana: Absolutely. Electricity is an intermediate good that supports economic activity in the country. When there are cuts in supply, one can most certainly expect a negative impact on the growth outcomes of the economy. However, these would likely reflect in the growth numbers of the next quarter.

Els: If load shedding is ongoing for a long period of time that would impact economic growth, and Moody's wouldn’t like that. Economic growth is one of the big factors in their decision because that impacts on the budget and debt ratios. Load shedding only lasted for a week. Moody's would highlight it as a risk, rather than an actual impact on the growth forecast.

Packirisamy: In terms of growth, Moody’s takes a longer-term view, and in that respect trend growth will have a bigger impact on the rating relative to growth in the first half of 2019. If the load shedding escalates or extends for a longer-than-expected period, this may damage prospects for trend growth and have an effect on the rating.

Glynos: The chances of a full downgrade have increased since the load shedding began, purely because of its impact on GDP (economic growth). This will have implications for the debt to GDP ratio, which will rise to higher levels; and the budget deficit, which could widen to 5% as opposed to the 4.5% which was projected.

Ackerman: If load shedding continues, it will shave about 0.5% off of economic growth. This will be very bad for all the fiscal targets that were outlined in the February budget. On that basis, Moody’s would definitely take this into consideration.

Could Moody’s hold off on making the announcement until after the elections? 

Skenjana: I think president [Cyril] Ramaphosa has sent a relatively clear message on the policy direction of the ANC and government. The preliminary polls suggest that the ANC will remain in power post elections, suggesting, therefore, some policy continuation. On that basis, Moody’s would not need to hold off until elections to release a ratings decision.

Els: It is possible that Moody's will wait till after the elections to see if there are any policy changes. But with the risks presented by load shedding, and its impact on economic growth, they might not wait in downgrading the outlook from stable to negative. It is a close call.

Packirisamy: Moody’s can choose to postpone the rating review, should they suggest the need for further information to make a rating decision. In that case, we view it likely that it would take place later this year after the elections, once they have more information on updated fiscal dynamics, Eskom’s turnaround plan and progress on SA’s structural reform agenda.

Glynos: They could, but I do not know what it [the election] is going to change. The ANC works as a collective. It's not like Ramaphosa is going to come in and all of a sudden it's going to be a brand new ANC. 

Ackerman: The elections won’t make any difference. For Moody's it’s all about whether we can create economic growth. Whether we can sort out Eskom and whether we can do all of that in time, probably before the mid-term budget in October.

What is the biggest risk to SA’s credit rating?

Skenjana: National debt levels and debt levels, losses, mismanagement and corruption at state-owned enterprises, specifically Eskom, will most likely be at the forefront of Moody's risk assessments.

Els: The biggest risk is the lack of economic growth. That might be why they could wait till after the elections to see if there are any growth-enhancing policy reforms coming.

Packirisamy: The financial and operational risks facing SA’s ailing parastatals still remain the biggest threat to ratings, in our view, given the threat they pose to government’s balance sheet.

Glynos: It's state-owned enterprises in general. So many of them are running sub-optimally, inefficiently, and need to be bailed out. Taxpyers will have to foot the bill.

All this has risen from a government "hellbent" on controlling everything, but they're inefficient in running companies. Government shouldn't be running these companies but they're stuck in an ideology which prevents them from thinking otherwise. The single biggest issue is ideology, it’s more of an issue than any specific SOE or event.

Ackerman: Right now, I think it is still the Eskom crisis that is the biggest risk to SA’s credit rating. Eskom, in particular, will cause us to slip from our current rating and be in a position where the fiscal situation deteriorates much more than what is expected. On that basis I think that if any of those SOEs move backwards, it will be our biggest risk for a credit rating downgrade.

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