Defend Truth


Moody’s should not be made the scapegoat for government’s failures


Jacques Jonker is an economic and legal analyst at the Free Market Foundation. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

Moody’s recently downgraded South Africa to sub-investment grade, resulting in much local criticism of the rating agency. But Moody’s was justified in taking this action, and the blame for doing so should be addressed not so much to them but to SA’s government.

In a recent editorial for Maverick Citizen, Mark Heywood wrote that South Africa should “Stop Dancing to Moody’s tune”. According to Heywood, Moody’s recent downgrade of South Africa’s sovereign credit rating was tantamount to “kicking somebody when they are down”, and that Moody’s decision “embodied the worst expression of unbridled private interest”.

Heywood’s critique, however, is flawed and merely serves to scapegoat an institution whose mission is to provide factually accurate credit ratings for investors (though it has not always done so), instead of laying the blame where it rightfully belongs: at the feet of the South African government.

South Africans are not unfamiliar with the names Fitch, Standard and Poor’s (S&P), and Moody’s, the three behemoths of the credit rating industry.

Government has done what can only be considered its utmost best to give these agencies every conceivable reason for downgrading the credit rating of the economy to junk status. However, out of the three agencies, Moody’s has been much, much more lenient towards the government. One almost had to start wondering whether they were, in fact, a credible institution not beholden to political interests within the upper echelons of government, or perhaps just plain naïve. After all, Fitch and S&P had thrust the title of junk status on SA three years ago.

Moody’s announcement on 27 March that they had downgraded South Africa’s credit rating to junk status came as a shock to many South Africans, who were outraged at such a brazen act of daring to state the cold, hard truth. Let us, however, not view this downgrade in a vacuum and have the same emotional, knee-jerk reaction to a private entity relaying the truth to the public (the polar opposite of what the state tends to do) and have a necessary glance at Moody’s history with respect to their view of  South Africa’s credit status.

Since 3 October 1994, when Moody’s first rated South Africa, they have never downgraded South Africa to junk status until now – not once. There have been seven instances of negative outlooks, and three negative watch outlooks, but outlooks and actual ratings are not the same thing.

Moody’s last positive outlook for South Africa was in June 2007.

For almost 13 years, the rating agency has been warning the government that it was skating on thin ice. Yet, even while they were warning the government, they still upgraded South Africa’s long-term foreign currency credit rating to upper-medium grade between 2009 and 2012. The warnings were nevertheless ignored: public wages kept rising, government debt kept rising, Eskom’s output kept falling, state-owned enterprises kept failing, the amount of looting kept on rising. And the fiscal cliff came ever closer.

Compared to Fitch and S&P, Moody’s appeared to be a godsend. Did their inevitable downgrade come at a bad time? Of course, there’s no denying this. Is it Moody’s fault that the government’s poor policy decisions and mishandling of its finances combined with Covid-19 to create the perfect storm? One would have to engage in a groin-tearing jump of logic to answer this in the affirmative.

The reasons for Moody’s downgrade can be summed up as follows:

  • Weak structural growth and constrained capacity to stimulate the economy;
  • Unreliable electricity supply;
  • Persistent weak business confidence and investment;
  • Long-standing structural labour market rigidities;
  • Uncertainty over property rights;
  • Impairment of attempts at fiscal consolidation, especially by the public sector wage bill;
  • Extreme levels of and consistent increases in government debt over the medium term; and
  • Detrimental effect of the coronavirus on South Africa’s economic and fiscal challenges.

The fact that Moody’s included the last point, along with the timing of the downgrade, has South Africans all riled up. Yet it begs the question: if the economic challenges facing South Africa weren’t induced and exacerbated by government, would the effects of Covid-19 have been as bad? The simple answer is, no.

It makes no sense to chastise Moody’s for merely recognising the reality of the situation and relaying that to investors – that is their duty. In fact, it would be unethical for a rating agency with the stated mission of providing “trusted insights and standards that help decision-makers act with confidence” to either hold off on releasing its verdict or to lie, simply to make matters easier for the South African government as Heywood feels they should have done. The government had ample chances to make life easier for itself and for citizens.

Those individuals who oppose certain austerity measures should be siding with Moody’s to reinforce their emphases on fiscal consolidation and good debt management. Extravagant spending in the context of a limited tax base requires the government to be able to sell low-yield bonds to enable it to raise more money at lower interest rates to fund the spending. For this to happen requires the government to be considered fiscally credible, which South Africa’s is most definitely not.

One would think that the logical response would be to chastise the institution responsible for the demise of the economy but, alas, this seems to be “a pipe dream.” It is ironic that Heywood conceptualises Moody’s as the enemy because he rightly thinks we should be focused on saving lives. The very issues that Moody’s raises are costing South Africans their lives even in the absence of a pandemic, as well as decreasing the standards of living of countless citizens.

Moody’s, along with other institutions and experts, has been warning government for years that, should it fail to address fiscal and structural economic issues, the consequences are going to be severe. It is just plain wrong to want to shoot the messenger of predictions that have come to fruition. BM


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