Just as he was basking in the ringing endorsement he got from Goldman Sachs, President Cyril Ramaphosa got a wake-up call from Moody’s Investors Service, which warned it might downgrade the country’s debt if he does not deliver promised reforms.
In a late-night report on Wednesday, the last major ratings agency that has SA on investment grade warned the country’s debt is set to balloon well above levels forecast by the government and that a failure to boost growth, curtail spending and improve tax collection will "put downward pressure on the country’s rating".
"On the surface of it, this move would seem to tilt the prospects for SA’s credit rating in a downward direction, though Moody’s would be likely to wait and see how the reform programme progresses before making a firm decision," Peter Worthington, a senior economist at Absa, said.
Including the government’s guarantees for debt incurred by Eskom, which analysts have described as the biggest single risk to the economy, Moody’s said a failure to tackle reforms could push the country’s debt as a percentage of GDP to more than 70% in three years’ time.
In its own pessimistic forecast released with the budget in February, the government said the ratio would climb to just more than 60% by the 2023/2024 fiscal year.
"In the absence of effective policy change, the sovereign’s credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low," Moody’s lead sovereign analyst Lucie Villa said in the report.
A ratings downgrade from Moody’s would be disastrous for SA as it would fall out of key indices such as the Citi World Government Bond index, prompting some forced selling by investors who trade the index. Some analysts have estimated that as a result more than R100bn could flow out of the country, putting pressure on the rand and interest rates.
The Moody’s report came just hours after Goldman Sachs, one of the world’s top investment banks, said it would increase its presence in the country, citing confidence that the election result, which gave the ANC almost 58% of the vote, would give Ramaphosa enough of a mandate to implement the promised reforms.
At a Goldman Sachs conference the same day, Ramaphosa signalled that he would trim his cabinet as a first step to creating a more capable administration.
The market reaction since the polls has been largely positive, with the rand up about 1.6% against the dollar from its close on May 7, trading at R14.2082 on Thursday afternoon. It has gained almost 4% against the pound since the polls.
"With the election over, we expect SA’s new government, when formed, will put forward policies to continue tackling the country’s main credit challenges — low growth, steadily rising debt, leveraged state-owned enterprises and weakened institutions," Villa said.
SA got a reprieve in March, when Moody’s did not make a scheduled pronouncement on the country’s ratings, sparking a relief rally in the currency and bond markets.
The country would not be able to avoid a downgrade without radical changes in the short term, said independent economist Thabi Leoka.
"They waited for the postelection outcome and now they are waiting for the appointment of the cabinet. It seems like they are kicking the can down the road," said Leoka, who was part of the panel that advised the government on additional goods to be exempted from VAT.
The statement by Moody’s was preceded by a report that showed weak retail sales, adding to signs that the economy contracted in the first quarter.
Data this week also showed that unemployment increased
to almost 28%, highlighting the challenges facing Ramaphosa’s government.
A weak economy suppresses tax revenue, making it less likely that the government will be able to reduce its budget deficit and avert a downgrade.
"Moody’s has been quite friendly to SA for a long time. Without pulling the trigger, they give us chance after chance with a bit of a warning," Efficient Group chief economist Dawie Roodt said.
"As a ratings agency, they are known for being quite soft," he said.
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