Reserve Bank holds on rates as downgrades loom
Fitch affirms SA’s credit rating at BB+ ahead of S&P and Moody’s decisions on Friday
The Reserve Bank kept interest rates on hold as expected on Thursday, ahead of ratings pronouncements by all three major agencies, citing upside risks to the rand and inflation from the anticipated ratings reviews as well as from the ANC’s electoral conference.
The Bank signalled that interest rates were likely to rise over the next couple of years.
Shortly after the announcement, Fitch affirmed SA’s credit rating at subinvestment grade BB+ with a stable outlook ahead of the announcements from S&P Global Ratings and Moody’s, which are due after 11pm on Friday night.
Fitch is the only agency that has both SA’s domestic and foreign debt in junk territory.
It warned that failure to implement credible fiscal consolidation, a further deterioration in expected GDP growth and rising net external debt would result in a further downgrade. But it also raised the possibility that things could change for the better after the ANC’s conference.
Fitch said: “The affirmation reflects that while a number of developments point to a weaker fiscal outlook and consequent faster pace of debt accumulation, potential fiscal consolidation measures after the ANC’s elective conference in December could mitigate those trends.”
In a statement noting Fitch’s decision, the Treasury warned again of the negative consequences of junk status.
“By not downgrading the country further, Fitch is providing SA with an opportunity to address issues that can lead to an upward revision to the ratings,” the Treasury said.
Most analysts expected S&P to downgrade SA’s local currency rating but had mixed views on whether Moody’s would do the same or instead wait until early 2018. On Wednesday three-quarters of analysts polled by Bloomberg said they expected S&P to downgrade SA’s local currency rating, after it junked the foreign currency rating earlier in 2017.
Bank governor Lesetja Kganyago said on Thursday the negative reaction to October’s medium-term budget statement and speculation regarding the introduction of free education had raised the risk of sovereign ratings downgrades.
Downgrades of local currency ratings would result in SA being excluded from international bond indices and could prompt a bond sell-off by investors of up to $10bn. Though the extent to which any downgrades were already priced in remained uncertain, Kganyago warned the rand could “overshoot” in response to a downgrade, recovering only later.
The economic policy implications of the ANC national elective conference in December could also dominate rand movements in coming weeks, the monetary policy committee said. Its interest rate decision, which was unanimous, was on the back of an inflation forecast for 2018 and 2019 that has deteriorated because of a weaker rand, higher oil prices and higher average wage growth. Kganyago also said that the rapidly deteriorating fiscal position revealed in the medium-term budget policy statement could reduce the scope for interest rates cuts.
For the first time, the committee also gave an indication of the path of interest rates over the next three years, based on a new quantitative projection model to forecast inflation and growth.
The model implies 75 basis points of interest rates increases by the end of 2019, though Kganyago emphasised that this implied path was a only broad guide to policy; the committee would not follow it unconditionally but would exercise its own judgment.
The committee’s stance suggests, however, that its July decision to cut interest rates was a one off and that it may again be on a hiking cycle.
Deputy governor Daniel Mminele said on Thursday that at the time the committee reduced rates in July, it did not indicate that it was embarking on an interest rate easing cycle. “We said we would continue to be guided by the data and that continues to be the case.”
Capital Economics senior emerging markets economist William Jackson said the Bank had made it “pretty clear … that any additional easing is off the table” and it had as a result taken out the rates cuts it had previously expected in 2018. “That said, policy makers are unlikely to deliver the interest rates hikes that the financial markets are now pricing in.”
FNB chief economist Mamello Matikinca said that while inflation would continue to moderate, “significant rand weakness could negate this downward trend”.
Further rates cuts were unlikely, “in fact we are likely to see gradual policy normalisation in the second half of 2018”.