SA not out of the woods on ratings downgrade

Cape Town - While Moody’s latest assessment of the South African economy provides a welcome reprieve, rating downgrade risks remain elevated, MMI economist Sanisha Packirisamy warned on Monday.

Moody’s, which decided to maintain SA’s foreign and local currency ratings at Baa2 (two notches above sub-investment grade), warned that further ratings are still dependent on a coordinated response by government, business and labour to implement structural and legislative reforms to enhance SA’s medium-term growth outlook, enabling a stabilisation of government’s debt measures and triggering widespread business and investor confidence.

Packirisamy said the investor focus has now shifted to the upcoming ratings review of Standard & Poor's on June 3.

The Baa2 rating from Moody’s is a notch higher than ratings from Fitch and Standard & Poor’s.

Adam Phillips of Umkhulu Consulting said while the news is positive, "we would need S&P to say something similar on June 3 and I think the market will continue to be concerned".

"If they do put a downgrading on hold (on June 3), it will be giving SA a further chance, as they will review again at the end of the year. I still think it is touch and go."

Citi Research economist Gina Schoeman said in their view, Moody’s decision to not downgrade South Africa was mostly based on the country’s stronger institutional strength exhibited in the first half of 2016, “which is the result of the SA Reserve Bank’s hawkish stance, the National Treasury’s accelerated fiscal consolidation, the Finance Ministry’s efforts to restore investor confidence and the judiciary’s independence as per the recent rulings by the Constitutional Court and the High Court of South Africa”.

Schoeman said the fact Moody’s kept the outlook negative, does not imply that a rating change is inevitable. It does however signify the potential evolution of the rating.

“Moody’s described the negative outlook as ‘the implementation risks associated with the structural and legislative reforms that the government, business and labour recently agreed…’, which is an obvious requirement to improve the GDP outlook and achieve fiscal consolidation.”

She said Moody’s may wish to see actual Q1 GDP (and potential GDP adjustments) when it is released on 7 June (postponed due to a technical handover from the SARB to StatsSA).  This is also after S&P’s June 3 review.

“While our baseline remains for a sub-investment grade foreign currency rating downgrade, this increases the risk that the same reasons that stalled Moody’s may well postpone S&P’s decision.”

NKC African Economics said in its daily economic report that it sees a more than even chance for a downgrade 'junk' status by S&P by the end of the year as "the tolerance for policy missteps is waning".

Packirisamy said Moody’s decision to leave SA’s rating unchanged was based on key three views. Firstly SA is seen to be approaching a turning point after many years of falling growth, secondly government’s debt metrics are showing some signs of stabilisation and thirdly recent political developments have highlighted the strength of SA’s institutions (including the strength of National Treasury and the Reserve Bank and the independence of SA’s judicial system in response to recent court outcomes involving the president).

She said the International Monetary Fund (IMF) had alluded to similar upside risks in their latest Article IV assessment on the country, speculating that the recent dialogue between government and social partners may spur faster implementation of structural reforms that are vital in reducing policy uncertainty and will go a long way in solving the region’s structural impediments.  

NKC however warned: "Yes, SA economy is heading for a turning point and the recent backlash to unconstitutional behaviour by those in office has been encouraging, but there is long, hard graft ahead and we still expect South Africa to be downgraded by at least one of the other rating agencies later this year."

Packirisamy said MMI expects that the medium term budget, together with developments on growth and structural reform will be important to both S&P and Fitch’s assessment of the country’s rating, leaving SA more vulnerable to the following ratings review date (2 December 2016).

Schoeman said given Moody’s forecasts GDP to be 0.5% in 2016 (Citi: 0.3%), rising to 1.5% in 2017 (Citi: 1.1%) and believes that gross debt to GDP wills stabilise at around 51%, October’s medium term budget has to achieve the more aggressive targets it set in February.

According to Reuters, Finance Minister Pravin Gordhan said at a public finance management conference on Monday that he will interact with Fitch and S&P in the next couple of weeks following the Moody's breather.

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