A scheduled review of SA’s sovereign credit rating by Moody’s Investors Service became something of a damp squib after the ratings agency said only that it opted not to update its Ba2 rating on the country’s debt, leaving it firmly in junk territory.
The ratings agency was scheduled to release a review of SA's credit rating late on Friday but instead issued a brief statement saying only that the nation was among several debt issuers whose rating was not updated on May 7 as per its calendar. While Moody’s was not expected to change its rating on SA’s debt, analysts would have been keen to gain insight into its views on the government’s ability to rein in debt given that its outlook on the country’s credit rating is negative, an indication that its next ratings move could be a downgrade.
“No rating action was taken, as per the announcement,” Peter Griffiths, a media relations executive at Moody’s, told Business Day in an emailed response to questions. “Moody’s sovereign release calendar is indicative of dates for potential actions only.”
SA received a double ratings blow in November last year when both Moody’s and Fitch cut the country’s sovereign debt rating deeper into junk territory. That happened just as the scale of the economic devastation caused by the Covid-19 pandemic was becoming evident, an impact that ultimately saw GDP contract 7% in 2020, the biggest slump in 100 years.
At the time both ratings agencies maintained their negative outlook on SA’s debt with Moody’s lowering its rating to Ba2, two notches below investment grade. Fitch cut SA’s credit rating to BB-, three notches into junk territory. S&P, which has not changed its assessment of SA’s debt since April 2020, assigns a BB- rating on the country’s credit risk, which is three levels below investment grade. It has a stable outlook on SA’s debt.
A factor that may cause ratings agencies to take a slightly more favourable outlook on SA’s debt trajectory is recent news that government’s main budget deficit in the 2020/2021 fiscal year was smaller than initially projected. The government recorded a deficit on its main budget equivalent to 11.2% of GDP in the year to end-March 2021, the National Treasury told Bloomberg on May 5. That is notably better than the 12.3% shortfall predicted by finance minister Tito Mboweni in his February budget speech and suggests the consolidated budget shortfall, which includes spending by provinces and social grant allocations as well as other expenditure, is likely to be lower than the 14% of GDP previously forecast by the Treasury.
The rand closed at R14.05/$ on Friday, the strongest level in about 16-months. It has advanced more than 4% against the dollar so far in 2021, making it the best performer among its major emerging market peers this year. Over that timeframe the yield on SA’s benchmark R2030 bond, which is at 9.02%, is up 30 basis points. Bond yields move inversely to their prices.
“SA’s debt burden is still seen to be very high, with risks to the achievement of the new budget estimates,” Investec economist Annabel Bishop wrote in a client note. The ratings agencies “will keep careful watch this year to see if the new debt and deficit projections can be met”.
Public sector wage talks between unions and government, which resumed on Friday after a two-week deadlock, are likely to give an indication of whether SA is able to deliver on its pledge to keep its debt levels below 90% of GDP. Government workers are demanding a wage increase of consumer inflation (CPI) plus 4% while government is tabling a 0% increase for the 2021/2022 fiscal year. The Reserve Bank expects inflation to average 4.3% in 2021.
“Expected outcomes have a direct bearing on ratings agencies’ assessments of SA’s fiscal strength,” Nema Ramkhelawan-Bhana, an analyst at RMB said in a client note.
Moody’s was the last ratings agency to strip SA of its investment grade rating when it cut its credit assessment on the country to junk in March last year as the pandemic began to bite. That resulted in SA dropping out of the World Government Bond Index, forcing investors whose mandates preclude them from investing in non-investment grade debt to dump SA bonds.
S&P is due to release its SA country review on May 21 while Moody’s next ratings review is scheduled for November 19. Fitch does not specify review dates.
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.