The failure by Moody’s Investors Service to take a more decisive view on SA’s deteriorating performance has confounded many South Africans and at least half of all economists, who were braced for an outlook downgrade at the end of March.
Many are battling to understand how Moody’s could allow itself to fall so far behind the curve and still retain credibility. How is it possible that Moody’s continues to believe, while South Africans increasingly do not?
A scary 2019 budget followed by prolonged stage-four load-shedding seemed to suggest, by the end of March, that the wheels were coming off the SA economy. Surely Moody’s would see this, South Africans reasoned, and join S&P Global Ratings and Fitch in junking SA’s rating — a move the other two ratings agencies made two years ago?
Things got even more confusing when Moody’s finally released a rating update, revealing that its growth and debt projections for SA had worsened and were decidedly more bearish than those of the Treasury. Whereas the SA government expects growth of 1.5% in 2019, rising to 2.1% in 2021, Moody’s expects growth of 1.3% in 2019, rising marginally to 1.5% in the following years.
Accordingly, Moody’s expects SA’s debt burden to reach 65% of GDP by 2023/2024, not the 60% the government is budgeting for. Of course, once the contingent liabilities of state-owned entities are included, government debt already exceeds 70% of GDP, the high-risk threshold associated with debt distress in other emerging markets.
The good news is that Moody’s has set the bar for junking SA extremely low. Its forecasts imply that even though economic growth will remain slow and fiscal strength will continue being eroded, SA will not be junked provided it performs in line with Moody’s extremely low expectations and other Baa3- rated countries (those on the bottom rung of the investment-grade ladder).
A few explanations have been suggested for Moody’s patent reluctance to withdraw SA’s investment-grade credit rating. One is that Moody’s has failed to capture SA’s fiscal deterioration sufficiently because many of its fiscal indicators are backward looking; they are based on 2017 data to allow Moody’s to make cross-country comparisons in a time-consistent manner.
But that doesn’t explain why Moody’s has raised the indicative factor score for SA’s fiscal strength from “moderate” to “moderate plus” over the past six months. Moody’s says it did this because of the favourable currency and term structure of SA’s debt and because the Treasury’s effective debt management policies reduce refining risk.
However, these two credit strengths have existed for some years. What is new is the fiscal slippage that has incurred over the past six months as a result of the Treasury having to fund a R69bn bail-out for Eskom. So, the technical explanations for Moody’s stay of execution are decidedly unconvincing. An alternate explanation is that Moody’s must have been privy to a credible off-the-books turnaround plan for Eskom and the economy and been convinced it’s achievable.
This appears to be closer to the truth, for despite the lack of economic reform that has occurred under President Cyril Ramaphosa, Moody’s still believes “the gradual implementation of the reform agenda of the new administration, combined with the reduction in political uncertainty following the May elections, will have a positive impact on confidence and lead to a gradual improvement in economic conditions”.
So, there you have it: Moody’s believes Ramaphosa can engineer a turnaround and is suspending judgment to give him time to deliver. But South Africans are a lot more sceptical, judging from the alarming way economic and confidence indicators continue to sag.
Only time will tell who called it correctly. But if, as many economists believe, a Moody’s downgrade remains inevitable, it will occur too late to be of any use to investors. In short, Moody’s is risking its own credibility by going out on a limb for Ramaphosa. He must wish his compatriots were as idealistic.
• Bisseker is a Financial Mail assistant editor.
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