Picture: REUTERS
Picture: REUTERS

SA may just be able to cling onto the stable outlook of its sole investment-grade rating this week, helping it stay clear of a forced selloff of billions of rand of its debt.

Economists are divided on what Moody’s Investors Service will do when it potentially makes an announcement on SA's credit assessment on Friday. Half the participants in a Bloomberg survey expect it to maintain a stable outlook on its local-  and foreign-currency debt, with the remainder predicting a reduction to negative. Many of those who foresee no change say there may be a move after the May 8 general election.

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The deepest power cuts in more than a decade by Eskom are hurting efforts by the continent’s most-industrialised economy to recover from 2018’s recession. The budget deficit will probably widen to the worst in 10 years as declining tax revenue and bailouts for underperforming government firms weigh on public finances, dimming hopes that the country will hold on to the stable assessment from Moody’s.

“I’m actually surprised that they’ve spared us this long,” said Lullu Krugel, the chief economist at PwC. “My call is that it is time. If I were them, I would pull the trigger” on the rating, she said. A cut wouldn’t be “the end of the world” because that’s already priced into assets, and while new debt would be more expensive, local equity markets could become even more attractive, Krugel said.

While Moody’s is scheduled to decide on SA’s assessment this week, it may end up only issuing a research report without a ratings action, or nothing at all. A reduction in the outlook tends to precede a cut in the actual rating. A junk assessment would see the country fall out of investment-grade debt gauges including Citigroup’s World Government Bond Index. That would result in “forced outflows” of about $1.1bn rand, according to Nomura. Investec estimates outflows of $8bn-$10bn.

Moody’s will probably give SA “the benefit of the doubt” after finance minister Tito Mboweni said the country’s strict conditional support for Eskom would not involve putting the company’s debt onto the sovereign balance sheet, said Inan Demir, Nomura’s head of Europe, Middle East and Africa economics. In February, the government committed to providing Eskom with R69bn over three years as it struggles to emerge from years of mismanagement, allegations of corruption and ballooning debt caused by cost overruns at two large new plants.

Moody’s is likely to wait to see the effects of rolling blackouts on economic growth and whether the government’s plan to turn Eskom around is viable before changing its rating, said Sanisha Packirisamy, an economist at Momentum Investments. There is a chance it will reduce its outlook to negative, which it can hold for as long as two years, she said.

Lower forecasts

The ratings company could reduce its forecast for economic growth and raise its expectations for the fiscal deficit, but it is likely that it sees Eskom as a short-run shock rather than a crisis with long-run implications, therefore maintaining the stable outlook, said Peter Attard Montalto, the head of capital-markets research at Intellidex.

“Moody’s has been driven by a strong sense of risk aversion against being responsible for or compounding problems in SA when this is really not their job at all — they are there to assess credit risk,” Montalto said.

With Sarina Yoo

Bloomberg