Picture: REUTERS
Picture: REUTERS

Moody’s Investors Service is generally expected, at about midnight on Friday, to affirm its credit rating of South African government bonds at Baa3 — its lowest level of “investment grade” — and hold its outlook at stable.

A shock downgrade would be disastrous for SA as Moody’s is the only one of the big three international credit ratings agencies to still view South African government bonds above junk.

“If Moody’s were to downgrade SA’s debt to sub-investment level, SA would be removed from the Citi World Government Bond Index, prompting asset managers and pension funds to sell domestic bonds. This would sharply increase the cost of debt and pressure the exchange rate,” PwC Strategy& economist Maura Feddersen said in a note e-mailed on Friday.

Given that SA recently switched finance ministers, with Tito Mboweni now scheduled to deliver the medium-term budget policy statement (MTBPS) on October 24, Moody’s may simply announce it is delaying the release of the country’s sovereign rating report until it has more information. 

Feddersen said the ratings agencies will focus on three issues in the medium-term budget: first, the pace of fiscal consolidation; second, reforms in state-owned enterprises (SOEs); and third, measures to lift economic growth. 

Said Feddersen, “If the medium-term budget effectively addresses all three priority areas, ratings agencies are likely to respond favourably. In the end, SA’s credit rating remains a crucial ingredient for keeping the costs of debt under control, and freeing up spending for SA’s most pressing economic challenges, including the alleviation of poverty, inequality and unemployment.” 

Graph: Will the government rein in debt-to-GDP levels?

“Following a notable increase in projected debt-to-GDP levels announced in the previous medium-term budget, ratings agencies responded negatively, and S&P downgraded SA’s credit rating further into sub-investment grade territory,” Feddersen said.

Concerns over the skyrocketing debt of Eskom and other SOEs are constantly raised by credit ratings agencies in their reviews of SA’s sovereign rating. In March, when Moody’s raised its outlook on SA to stable from negative, it included the warning: “The still-fragile state of many SOEs, in particular Eskom, poses material contingent liabilities.”

“Ratings agencies will look out for any measures announced in the medium-term budget that help stabilise the precarious finances of SOEs. Measures focused on improved governance, clarifications of mandate and strategy, strong oversight and regulation, as well as enhanced operational efficiency, could significantly improve the developmental impact and financial viability of SOEs. These, in turn, would be viewed as credit-positive by ratings agencies,” Feddersen said.

President Cyril Ramaphosa recently announced R50bn stimulus and recovery package. Said Feddersen: “The ratings agencies will look closely to determine whether these interventions lift the outlook for potential growth in the medium term.”