Moody’s puts SA on review for downgrade
SA received a reprieve from Moody’s on Friday night, with the agency remaining the most generous of the big three credit rating agencies in being the only one to still rate both foreign- and local-currency South African government bonds as “investment grade”.
As expected, Moody’s placed SA’s rating on review for a downgrade.
Moody’s maintained its sovereign rating for SA at Baa3, which equates to BBB- in S&P’s and Fitch’s nomenclature. This is one rung above junk status.
In a statement on Friday, Moody’s said: “The decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that SA's economic and fiscal challenges are more pronounced than Moody's had previously assumed. Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether, these promise a faster and larger rise in government debt-to-GDP than previously expected.”
Moody’s added that the review would leave room for it to assess the government’s willingness and ability to respond to these rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that eased domestic bottlenecks to growth; and improvements to state-owned companies’ governance that contained contingent liabilities.
The review period is expected to conclude by the 2018 budget in February.
“This will also allow Moody's to assess the policy implications of political developments during the review period and the likelihood of pressures on SA's key policymaking institutions persisting.”
It added that SA maintained credit strengths that supported its current rating including deep domestic financial markets and a well-capitalised banking sector; a strong macroeconomic framework; and low foreign currency debt as well as strict adherence to the constitution.
On April 3 when instead of joining S&P and Fitch in downgrading SA after President Jacob Zuma replaced Pravin Gordhan with Malusi Gigaba as finance minister among other dubious appointments in his March 31 Cabinet reshuffle, the ratings agency appended the word “watch” to its negative outlook.
When Moody’s did issue its downgrade to Baa3 from Baa2 two months later on June 9, it reset its outlook to negative.
Judging from past history, this makes it likely Moody’s will join S&P and Fitch in rating SA as junk in its next review in 2018.
The rand initially fell to R14.15 to the dollar, from R13.88, soon after the announcement but recovered to R14.10 shortly thereafter.