Carol Paton Writer at Large

Credit ratings agency Moody’s expects SA’s government finances and debt profile to deteriorate further and economic growth to recover only slowly over the next two years.

But despite this the agency said in a report on Tuesday that it expects the country’s credit profile “to  remain in line with those of Baa3-rated sovereigns”, partly explaining why it chose not to take a rating decision as scheduled on March 29.

The agency said it expects growth to reach 1.3% in 2019 and 1.5% in 2020. This is more pessimistic than the Treasury, which forecast 1.5% and 1.7% respectively, and the Reserve Bank, which in March estimated growth at 1.3% and 1.8%, respectively.

It also forecasts bigger budget deficits — 4.9% in 2019 compared with the Treasury’s 4.5% — and a higher debt trajectory, which will reach 65% of GDP by 2023.

Moody’s was due to announce a rating decision on Friday, but decided not to do so, saying it would update its view again on November 1.

The agency, which rates SA debt as Baa3 with a stable outlook, is the only one of the three main ratings agencies that still has SA sovereign debt at investment grade. A downgrade by Moody’s could trigger severe consequences for SA, causing the outflow of money by overseas investors and raising the cost of borrowing.

Moody’s notes SA’s credit strengths as: strong institutions, such as the SA Reserve Bank and judiciary; a well-capitalised banking sector and deep financial markets; and a low share of foreign-denominated debt held by the government and the broader economy. 

These would have been key to why Moody’s did not change its outlook or rating last week, despite the deterioration of the growth outlook, the re-emergence of electricity supply constraints and deteriorating government finances.

But while Moody’s says SA is still in line with peer countries, the agency also notes that it will be difficult for it to claw its way back up the ratings scale.

“Any reversal will be gradual at best given that social, economic and fiscal policy objectives will remain difficult to reconcile.”

The key challenges to SA’s credit profile include: deep-rooted social and political divisions that hamper reforms and generate policy uncertainty; structural economic bottlenecks that limit growth and employment; and a weak state-owned enterprises sector.

Moody’s also issued a warning on Eskom saying that the combination of government support — R23bn a year for the next decade — and tariff increases granted by the National Energy Regulator of SA “may prove insufficient to address the company’s long-standing financial troubles”.

SA has “a low susceptibility to event risk” of which the key driver in its case is the domestic political situation. Recent changes in the political landscape has lowered this risk and offered the possibility of reform, although this must be balanced against “a history of political infighting that has generated policy uncertainty in the past”.