Moody’s expects SA confidence to rise after elections
Despite slow growth and an erosion in fiscal strength, SA’s credit profile will remain in line with countries one notch above junk status, it says
SA is expected to see surge in confidence following the elections in May, as the current administration under President Cyril Ramaphosa is continuing to gradually move forward with the implementation of its reform agenda, Moody’s Investors Service said.
“We expect that the government's policies and the institutions will remain focused on addressing this trend but any reversal will be gradual at best given that social, economic and fiscal policy objectives will remain difficult to reconcile,” Moody’s senior credit officer Lucie Villa said in a report on Tuesday.
Despite slow growth and an erosion in fiscal strength, SA’s credit profile will remain in line with countries one notch above junk status, she said.
Moody’s expects growth to accelerate to 1.3% in 2019, and 1.5% in 2020. This is in line with the Reserve Bank’s forecast for 2019 and slightly below the Treasury forecast of 1.5%.
Importantly, the report does not constitute as a ratings action. SA had a reprieve at the end of March when Moody’s did not make a pronouncement on the country’s ratings. Moody's is the only major ratings agency that has not already downgraded SA’s sovereign debt to subinvestment grade. SA’s debt is rated at Baa3 by the agency, one notch above junk status, with a stable outlook.
Since Ramaphosa took over as president in February 2018, he has made tackling corruption central to his policy plans and has appointed new leadership at some key ministries and state-owned enterprises (SOEs), including Eskom, and at the SA Revenue Service.
“Ramaphosa has managed to avoid damaging political, social and economic confrontation to manoeuvre the sociopolitical landscape and push forward with key steps against state capture,” she said.
“The main risk, however, is that members of the government turn out to be involved in state capture, thereby leading to a high turnover of ministers and with it, at times, policy uncertainty. The process will also take time to gain legitimacy.”
The ANC has come under heavy criticism over its national list of candidates for the May 8 elections, which includes controversial politicians such as Bathabile Dlamini, Malusi Gigaba, Mosebenzi Zwane and Nomvula Mokonyane, who have been implicated in allegations of state capture or been found to have lied under oath.
The Moody's report lays out factors that could change SA’s rating. SA could see an upgrade in its credit rating with the successful implementation of structural reform to raise potential growth and stabilise and eventually reduce the government's debt burden through SOE reform, Villa said.
However, if Moody’s expects the government debt and contingent liabilities to continue to rise or if growth remains at very low levels such as the 0.8% recorded in 2018, SA could see a downgrade.
“SA's key credit challenges stem from slow growth amid persistently high unemployment, particularly among the country's young population. Deep socioeconomic inequalities not only make reform advancement difficult, which would otherwise unlock the economy’s potential, but also contribute to tensions that feed into political risk,” Villa said, warning that financially weak SOEs posed material fiscal risks for the government.
“We anticipate that government policy and the institutions will remain focused on addressing this trend but any reversal will be gradual at best given that social, economic and fiscal policy objectives will remain difficult to reconcile,” she said.