Picture: REUTERS
Picture: REUTERS

SA has received another reprieve from Moody’s Investors Service. The credit ratings agency says that SA’s credit rating may be upgraded, depending on certain economic reforms.

This is according to a credit opinion from the agency, which importantly does not constitute any rating decision. 

“Successful implementation of structural reforms to raise potential growth as well as stabilize and eventually reduce the government's debt burden, including through reforms to SOEs that reduce contingent liabilities, would exert upward pressure on SA's ratings,” reads the report compiled by Moody’s vice-president Lucie Villa.

The government is currently rated investment grade (Baa3) with a stable outlook, with a credit profile supported by a diversified economy, a sound macro-economic policy framework and relatively deep financial markets, Villa said. 

However, she warned that rising government debt and contingent liabilities risks from state-owned enterprises (SOEs), “which limit the capacity of the government to absorb potential shocks or use fiscal stimuli, as well as persistently low growth” remain credit constraints.

This comes ahead of the medium-term budget policy statement (MTBPS) next week, which will be a key determinant for SA’s credit ratings. A credit ratings decision was initially scheduled for last week Friday, and it is not immediately clear when it will make a move. 

“The stable outlook balances upwards and downwards pressures. On the one hand, it reflects policymakers’ commitment to reviving growth and stabilising government debt and guarantees over the medium term, which an effective institutional framework will support,” reads the report. “On the other hand, the outlook also recognises that these objectives are difficult to reconcile, especially given deep social and economic divisions.”

The successful implementation of structural reforms to raise potential growth, as well as stabilise SOEs through reform, could see an upgrade. However, if the government does not stabilise its debt burden and contingent liabilities from SOEs, and growth prospects remain dim, this could trigger a downgrade.

Nene vs Mboweni

This comes in the week after Tito Mboweni took the reins from Nhlanhla Nene as finance minister. Economists said, apart from Mboweni’s appointment, little has changed since the relatively upbeat Moody’s investor conference in September to warrant any deterioration in the outlook.

At that conference, the ratings agency said a change in SA’s rating was unlikely until at least after the national elections in 2019.

“While they are, like everyone else, expecting deterioration in the fiscal metrics at the mid-term budget, they acknowledge that the low foreign-currency exposure and maturity profile of SA’s debt should provide a platform for recovery,” said FNB chief economist Mamello Matikinca.

Moody’s is the last of the three major credit rating agencies to keep SA’s credit rating at investment grade level, currently with a stable outlook. S&P and Fitch both downgraded SA to junk status last year, in response to the surprise cabinet reshuffle and an unfavourable mid-term budget in October. Economists say both ratings agencies are likely to maintain a stable outlook.

A downgrade to sub-investment grade would see SA expelled 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.

Economic growth

Villa warned that slower-than-expected economic growth will heighten policy challenges. SA fell into a recession for the first time in a decade after two consecutive quarters of negative growth earlier this year.

“The broad-based weakness in economic growth further heightens policy challenges, including the stabilisation in the government debt-to-GDP ratio. It also stresses the importance for the government to move forwards with its policy agenda,” she said.

In the lead up to the med-term budget next week, Villa said fiscal consolidation remains achievable, despite headwinds stemming from slower growth than previously anticipated, which would impact tax performance.

Before resigning, Nene warned that the Treasury would revise down its growth forecasts after a slew of weak data points. The Reserve Bank has already slashed it forecast to 0.7%.

Said Villa: “While the change in finance minister a few weeks before the mid-term budget may lead to last-moment changes in policy implementation, we would not expect the broad direction of policy to be dependent on individuals, in particular given that institutions in SA have proven resilient to challenges in recent years.”