Hilary Joffe Editor-at-large
S&P Global's offices in New York. Picture: REUTERS
S&P Global's offices in New York. Picture: REUTERS

The Reserve Bank and ratings agency S&P Global have countered market euphoria with a more measured view of SA’s outlook that emphasised that there were still big risks to its ratings and the rand.

As the rand hit fresh highs on Thursday on speculation of an early exit for President Jacob Zuma, the Bank’s monetary policy committee kept interest rates on hold, despite a better inflation outlook, citing the risk that ratings agency Moody’s Investors Service could downgrade SA’s rating to junk status.

The rand firmed to R12.14 to the dollar by Thursday evening.

S&P’s Konrad Reuss told a conference in Sandton there had been no change in the key concerns — about growth, the budget and state-owned enterprise debt — the agency had flagged when it downgraded SA’s rating in November.

Reuss emphasised, however, that S&P had put SA’s rating on stable outlook for the first time since the downgrade cycle began and said new leadership had the opportunity to implement reforms that would improve the growth outlook.

Most economists had expected the Bank to keep interest rates unchanged and Bank governor Lesetja Kganyago said on Thursday that five of the committee’s six members had favoured keeping rates on hold, with only one preferring a 25 basis point cut.

Kganyago, who was also appointed to chair the IMF’s international monetary and financial committee on Thursday, said some of the risks to the inflation outlook had dissipated in recent weeks, with the rand appreciating after the ANC elective conference and a lower than expected tariff increase that was granted Eskom.

However, a further downgrade to SA’s credit ratings "remains a risk and will depend on government’s response to the deteriorating fiscal position and commitment to credible growth-enhancing policies", the committee said.

Moody’s is the last of the three leading ratings agencies that still has an investment-grade rating on SA but it has the rating on review for a downgrade and is expected to announce its verdict once the budget has been delivered on February 21.

The Bank has adjusted its economic growth forecast up to 0.9% for 2017, rising to 1.4% for 2018 and 1.6% for 2019. The Bank’s average inflation forecast for 2017 is unchanged at 5.3%, but it has revised down its 2018 and 2019 forecasts, to 4.9% and 5.4% respectively.

Kganyago said that although inflation was seen falling to below the midpoint of the target range, the Bank’s forecasts showed it would creep up and inflation expectations remained towards the upper end of the target range. Investec Asset Management’s Nazmeera Moola said: "We do not expect rates to fall until the MPC [monetary policy committee] is comfortable with the fiscal outlook, which requires a resolution to the Eskom risks coupled with a sensible budget that starts to improve
investor confidence."

Nedbank economists Nicky Weimar and Dennis Dykes said the case for interest rate cuts would begin to grow if there were good news over the next month or so and the rand continued to strengthen.

"Alternatively, a botched state of the nation address combined with a disappointing budget and further sovereign downgrade could dent the current buoyant sentiment equally as quickly," said Weimar and Dykes.

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