It is all happening in slow motion, but inexorably South Africa is lining up its ducks so that Moody’s will have no choice but to pull the trigger and complete the descent of Pretoria’s last investment-grade rating into “junk status”.
S&P and Fitch, the other two global rating agencies that investors and markets use as guideposts, pulled their triggers in 2017 against the backdrop of mounting scandals under former president Jacob Zuma. Moody’s has been a reluctant executioner but its patience is almost spent.
Moody’s on Friday revised its South African outlook to “negative” while maintaining its Baa3 rating – the lowest category in the investment-grade stable – on the country’s debt. This means a ratings downgrade to sub-investment levels is probable within the next 12 to 18 months unless South Africa gets its fiscal house in order. But such a move could come sooner, with the first big test the Budget that will be unveiled in February.
“Unless we see corrective action in the February Budget, we could be looking at a heightened risk of downgrade to sub-investment grade levels,” Razia Khan, chief Africa and Middle East economist at Standard Chartered, told Business Maverick.
The omens in that regard are not good.
“The negative outlook signals, in part, Moody’s rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth,” Moody’s said.
“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 Budget process and statement, will be crucial to sustaining the rating at its current level,” the agency said.
By “political capital”, Moody’s meant the political will within the ruling ANC to slash spending, slow the growth of government’s mounting debt pile amid demands from too-big-to-fail SOEs such as Eskom, and effect structural reforms to kick-start economic growth, which is expected to be a paltry 0.5% this year.
The message is clear – it’s the politics, stupid. And the politics for the past decade have, for the most part, been stupid, which is why South Africa is now on the brink.
If and when Moody’s does pull the trigger, it will raise the costs on that debt pile and see South Africa’s likely exclusion from the World Government Bond Index of local-currency debt, which will cut its pool of potential investors. That, in turn, will have implications for spending, as more money will have to be diverted to servicing debt, with consequences for the value of the rand currency. It will also be another knock to the confidence that is extremely arduous to rebuild.
“South Africa’s ratings would likely be downgraded were Moody’s to conclude that those conditions will not be met and that South Africa’s fiscal and/or economic strength will continue to erode,” the agency said. Pointedly, it noted: “A rating upgrade is very unlikely in the near future.”
It said it expected government debt to hit close to 80% of gross domestic product (GDP) by the end of the 2022 fiscal year from 57% at the end of 2018, a rapid rise to levels that would be difficult to slash, with the added burden of the costs linked to junk status.
The picture that emerges is one of a downward spiral.
Moody’s noted the R150-billion in cuts over three years outlined by Finance Minister Tito Mboweni in his medium-term budget policy statement, but pointed out that the measures to do so have not been identified other than a vague “focus on containing the public sector wage bill”.
As Moody’s was delivering its verdict, Johannesburg was getting soaked with its first proper and overdue summer rains, and then on Saturday, the Springboks won the Rugby World Cup as the clouds parted. Amid the gloom, the weekend, at least, was not a complete washout. But markets will still render their judgment come Monday, and that could jolt a hungover nation. BM
All the flags on the moon are now white due to radiation from the sun and a lack of atmosphere.