Ratings agency Moody’s has made it all but certain that it will downgrade SA’s credit rating to junk status at its next review on November 24, saying that last week’s medium-term budget policy statement signalled a change in policy direction that was credit negative.
The agency said this had put the sustainability of SA’s public debt at risk.
The stern comments from Moody’s, in a report on the medium-term budget statement released on Monday, raise the prospect that large amounts of capital will flow out of SA’s bond markets as investors move to anticipate the junking of SA’s domestic bonds, putting pressure on the rand exchange rate.
Moody’s downgraded its rating on SA’s foreign and rand-denominated bonds and put the country on negative outlook in April, following the cabinet reshuffle in which Malusi Gigaba replaced Pravin Gordhan as finance minister.
A junk rating on the domestic bonds by both Moody’s and S&P Global would prompt SA’s ejection from the key World Government Bond index and economists estimate this could lead to R80bn-R130bn in bond sales from the global tracker funds that track the index.
The Moody’s report comes after Fitch, which has SA’s domestic and foreign ratings in junk territory, issued a bleak response to last week’s budget.
S&P has yet to comment.
Markets had expected the ratings agencies to wait until the ANC’s December elective conference, when the governing party is expected to elect its next leader, to decide on their next move. However, the Moody’s report made no mention of the December conference, and its tone suggests the deteriorating public finances and absence of any clear plan from Gigaba to bring down SA’s public spending could be enough to trigger a November downgrade.
Moody’s said on Monday the medium-term budget policy statement was the first budget document (medium-term or main) in the past several years that did not have the objective of fiscal consolidation.
It pointed to Treasury forecasts showing that the debt burden would be increasing almost 7% annually between 2016 and 2020, and that the interest burden would be 15% of revenue by 2020-21 – which is above the 9.8% median for other countries with similar ratings to SA’s.
"In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk," the agency’s lead sovereign analyst for SA, Zuzana Brixiova said.
Moody’s suggested expenditure would have to be cut, but was sceptical that this would be politically possible ahead of the 2019 general election.
"With lower levels of revenue than formerly projected, the thrust of the adjustment would need to come from the expenditure side, which will be challenging to achieve amid rising spending pressures in the run-up to the 2019 elections," Brixiova said in the report.
In its response to the medium-term budget statement on October 26, Fitch also noted a change in policy direction, saying the budget contained no measures to contain the effect
of the fall in revenue on deficits and debt. "This suggests that the change in direction of policy making away from a focus on fiscal consolidation that we anticipated as a consequence of March’s cabinet reshuffle is under way and occurring faster than we had expected."
Fitch also questioned whether the government’s self-imposed expenditure ceiling was still a fiscal policy "anchor", with spending breaching the ceiling because of the bail-out of South African Airways and the Post Office. Fitch pointed to substantial additional risks to the government’s expenditure ceiling, including the public sector wage negotiations and likely capital injections for state-owned enterprises.
The rand, which lost as much as 5% against the dollar last week, following the medium-term budget policy statement, showed little reaction on Monday to the Moody’s report, strengthening slightly to trade at R14.08 as investors kept an eye on monetary policy developments in the US and UK.
Moody’s is the only one of the big three ratings agencies to still rate SA one notch above junk — Baa3 in Moody’s nomenclature — and is likely to cut SA’s rating to Ba1, which equates to BB+, placing it at the same level as ratings by Fitch and S&P Global Ratings.
Brixiová said the medium-term budget is the first budget in the past few years that did not commit to fiscal consolidation, a clear indication it would look to downgrade SA’s rating.
“Moreover, the lack of fiscal consolidation in the budget is also a setback to already feeble business confidence and growth. The lack of fiscal prudence indicated by the budget will undermine growth in an economy in a recession since first-quarter 2017 with weak economic activity, according to recent high-frequency indicators,” she added.
Brixiová also flagged the increase in government guarantees to state-owned enterprises, particularly Eskom: “In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.