Analysts who thought a downgrade by Moody’s Investors Service at the end of this month could not happen without a change to the outlook are wrong.
This is because a rating can be downgraded without previously having been assigned a negative outlook, according to a reference guide from Moody’s sent to Business Day on Tuesday.
A ratings outlook is an opinion regarding the “likely rating direction over the medium term”, it said.
This means SA could still see a downgrade later this month, when Moody’s is set to make an announcement. Moody’s does not need to first change SA’s outlook to negative to signal a future ratings downgrade to junk.
However, after the initial assignment of a stable outlook, about 90% of ratings experience no change in rating during the following year, Moody’s said.
“They don’t have to change the outlook before if they don’t want to, but it would be unusual for them to do so,” Nedbank chief economist Dennis Dykes said.
“I don’t think they’d make a move that drastic in the current circumstances. The deterioration hasn’t been severe enough to warrant that,” Econometrix MD Azar Jammine said.
The outlook serves as a guideline, whereby a stable outlook indicates a low likelihood of a rating change over the medium term and a negative, positive or developing outlook indicates a higher likelihood of a ratings change.
Moody’s is the only major ratings agency that has not downgraded SA’s sovereign debt to sub-investment grade. The ratings agency has SA’s debt at Baa3 with a stable outlook, one notch above junk status. Both Fitch Ratings and S&P downgraded SA’s sovereign debt to non-investment grade in 2017 in response to the surprise cabinet reshuffle.
But the weakness of SA’s public finances and a bailout for embattled state-owned entity Eskom have raised concerns that the country will lose its final investment-grade rating.
“Last month’s budget statement, which implies further fiscal tightening over the coming years, seems to have stayed Moody’s hand,” Capital Economics economist John Ashbourne said.
NKC Africa economist Elize Kruger maintains there is a growing chance Moody’s will change SA’s outlook back to negative, but the agency will probably opt to keep an eye on developments and implementation post-elections.
Historically, about a third of issuers have been downgraded within 18 months of the assignment of a negative rating outlook, Moody’s said.
This could spell a downgrade within 18 months from a possible change in outlook, Investec chief economist Annabel Bishop said.
A downgrade from Moody’s would lead to an increase in the borrowing costs for the private sector and the government, which would put more strain on consumers as costs go up. It would also see SA fall out of key gauges such as Citigroup’s World Government Bond index, which may prompt investors to dump as much as R100bn of SA assets.
The government’s ability to make real progress on implementing the reforms outlined in the budget over the next year will be critical if it wants to maintain its investment-grade credit rating from Moody’s, Stanlib chief economist Kevin Lings said.
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