It is touch-and-go whether Moody’s ratings agency will downgrade SA’s sovereign credit ratings on Friday or give SA more time to undertake reforms to raise the growth rate.
Historically, Moody’s has been the most bullish of the three leading agencies on SA.
It has SA’s foreign currency rating pegged two notches higher than the others, on Baa2 (with a negative outlook), compared to Fitch and S&P, which both have SA ranked on the bottom rung of the investment grade ladder on BBB-.
S&P already has SA on a "negative" outlook while Fitch still has SA ranked "stable". S&P is due to announce its rating review on SA on December 2, with Fitch expected to move the same day or in the week of December 5.
In June, all three agencies affirmed SA’s ratings, but only Moody’s made an overwhelmingly positive assessment of the economy and the ability of the Treasury to return SA to fiscal stability and re-ignite growth.
On Friday evening, Moody’s will update this view under a new, and possibly more bearish, lead analyst, Zuzana Brixiova.
In September, Brixiova warned that escaping a future downgrade hinged on whether the South African government stuck to its fiscal consolidation path and delivered on its reform efforts by improving labour market flexibility and containing the contingent liabilities of state-owned enterprises (SOEs).
SA has made some progress on the first two requirements. The Treasury held the line in the medium-term budget, further cutting expenditure and raising taxes to ensure that net debt stabilises below 50% of GDP, despite slower growth.
In Nedlac, broad agreement has been reached on a package of labour stability reforms that organised business is optimistic will reduce violent and protracted strikes and heralds a more constructive era of labour relations.
This could earn SA ticks in two boxes, but many economists doubt it will be enough to stave off further downgrades.
"We are not persuaded that these reform efforts go far enough to transform SA’s growth prospects or durably remove the risk of ratings downgrades," said HSBC economist David Faulkner.
He noted that SA underperforms other BBB-rated economies in several key credit areas owing to its anaemic growth rates, elevated inflation, larger fiscal and current account deficits, and worsening debt dynamics.
What all three ratings agencies really want to see is evidence that SA is putting in place the building blocks towards a sustainable growth recovery.
However, with political tension as taut as ever, despite the withdrawal of fraud charges against the finance minister, there is little evidence that the economy is government’s primary concern.
"For all agencies the short-run fiscal situation is not really the issue. Instead, it is about long-run fiscal and debt sustainability as a function of long-run growth dynamics — on which front the agencies all have serious concerns," Nomura economist Peter Attard Montalto said.
He agreed with Faulkner that the announced reforms, though welcome, were too minor to alter SA’s growth trajectory. As such, the market had underpriced the risk of further downgrades this year, he warned.
He expected Moody’s to cut SA’s rating on Friday; S&P to cut SA’s local currency rating which is ranked two notches above its foreign currency rating in order to reduce the gap between the two; and for Fitch to hold pat.
Old Mutual Investment Group chief economist Rian le Roux expected the same action from S&P. "If S&P does leave our rating unchanged, this will buy SA a little more time to get its house in order, implementing some much-needed reforms and consolidating the tentative progress the economy is making," he said.
It is impossible to say how much bad news is already priced into the rand but with financial markets trading as if SA is already junk rated, economists are hopeful that if it is stripped of its investment grade rating by S&P next week it will not ignite a huge run on the rand.
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