Moody’s puts SA on notice as it changes its outlook to negative
The outlook change reflects the ‘material risk’ that the SA government will not be able to stop the deterioration of its finances
Ratings agency Moody’s Investors Service lowered its outlook on SA’s credit rating from stable to negative on Friday, signaling that the country has an 18-month window to get its house in order to avoid being cut to junk status.
The ratings agency kept SA’s debt at Baa3, one notch above sub-investment grade, or junk. The change in outlook was largely expected by the market but raises the likelihood that SA government debt could be downgraded.
Moody’s said in a release late on Friday night that the change in outlook to negative “reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures”.
“The challenges the government faces are evident in the continued deterioration in SA’s trend in growth and public debt burden, despite ongoing policy responses,” it said.
The financial stress for state-owned enterprises (SOEs), in particular Eskom, continued to require “sizeable” ongoing support from the government, Moody’s said. It warned that “a credible fiscal strategy to contain the rise in debt” in next year’s February budget will be key to SA retaining its rating.
But the agency also flagged the “rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth”.
SA’s long-diagnosed problems of structurally high unemployment and income and wealth inequality are longstanding and deeply-entrenched constraints on the country's growth potential. But “resistance to reforms from key stakeholders limit the government's room to adopt and implement structural reforms”, Moody’s noted.
A cut to sub-investment grade would mean SA will be forced out of important global bond indices targeted by large international institutional investors, such as the FTSE World Government Bond Index (WGBI). The expected outflows of capital — which some estimates have put at around $15bn, according to Bloomberg — would put pressure on the currency, raise the cost of government debt and see costs across the economy rise.
In a statement responding to the decision finance minister Tito Mboweni said while he had hoped for a different outcome, he acknowledged the rating action by Moody’s “with a heavy heart”.
“Fellow South Africans, now is the time to roll up our sleeves and do what we have to do. It is now or never. We need all hands on deck. Government, labour, business and civil society, we need each other more than ever before,” Mboweni said.
In a statement from the Treasury following the news, it said the action offered SA a “narrow window” to demonstrate concrete implementation of reforms to lift growth and stabilise public finances.
The announcement came in the wake of the medium-term budget policy statement (MTBPS) that outlined a severe deterioration in the government’s fiscal position. Poor economic growth, large shortfalls in tax revenues and added spending to support ailing state owned entities has resulted in key fiscal metrics deteriorating sharply. The budget deficit is now expected to average 6.2% over the coming three years, while the debt to GDP ratio is expected to reach 71.3% by 2022/2023.
The Treasury said the government had, however, made progress on measures announced by president Cyril Ramaphosa in September last year, including changes to the visa regime to boost tourism and the publication of the Integrated Resources Plan (IRP).
The MTBPS also outlined the need for difficult decisions to be made to stabilise government finances, notably on the need to reign in the public sector wage bill, the Treasury said. “Government will discuss these matters with labour in due course,” it said.
Moody’s has held out the longest in moving SA to sub-investment grade. Its peers S&P Global and Fitch lowered the country to junk status in 2017.
Ahead of the decision, the rand had slumped 3% against the dollar this week, including a 2.35% fall on Wednesday, when finance minister Tito Mboweni slashed SA’s 2019 growth forecast to just 0.5%, and warned SA’s fiscal deficit would rise further. SA’s generic ten-year bond yields rose to a more than four-month high, at 9.26%, up 36 basis points, or 0.36 percentage points. Bond yields move inversely to their prices.
Implied one-week volatility for the rand rose to 17%, a two month high, on Friday. The rand is expected to be the most volatile emerging-market currency over the next week, according to Bloomberg data.
The rand was little changed within a couple of hours of the Moody’s statement, trading at R15.06/$ from Friday afternoon’s close of R15.03.