When the Reserve Bank’s monetary policy committee met in January, the primary risk featuring in its discussions was the prospect of a sovereign credit ratings downgrade, which could have had a significant impact on the rand and bond yields. The key issue was the coming February budget, which was seen as key to avoiding a downgrade.
The downgrade risk was one big reason for the committee opting to leave interest rates unchanged. But as the committee begins its meeting on Monday, SA has not only escaped being junked by Moody’s but has also, unexpectedly, had the ratings outlook upgraded from "negative" to "stable".
Moody’s Friday night statement was fairly realistic about the growth and political risks that still face the Ramaphosa administration. It warned that it would take a dim view if the policy approach to land expropriation or the Mining Charter goes in a direction that indicates the government is less than committed to improving the environment for investment and growth.
SA should heed the warnings that Moody’s has sounded about delivering on those promises of structural reforms to boost the growth rate and sorting out state-owned enterprises such as Eskom, if it doesn’t want to face being junked again in 2019
Moody’s has always put more focus on the strength of institutions than have the other ratings agencies, which was one of the reasons SA was more highly rated on the Moody’s scale than it was at S&P Global Ratings or Fitch. Moody’s latest decision is consistent with this stance and explicitly gives credit to the early action taken by President Cyril Ramaphosa’s new administration to shore up institutions including the Treasury and South African Revenue Service. Moody’s said it had confirmed the investment-grade rating because the previous weakening of institutions would now gradually reverse and if sustained this would boost SA’s economic growth prospects.
That’s good news and comes as a reminder of how important it is to ensure the integrity and independence of bodies such as law-enforcement institutions, the media and Reserve Bank. SA should heed the warnings that Moody’s has sounded about delivering on those promises of structural reforms to boost the growth rate and sorting out state-owned enterprises such as Eskom, if it doesn’t want to face being junked again in 2019. But for now, at least, the ratings agency risk to the rand has been taken off the table, with the rand strengthening since the Moody’s announcement.
Inflationary pressures have moreover been very muted, with February inflation figures coming in at a better-than-expected 4%, down from 4.4% in January, making it 11 months now that inflation has remained below the 6% top of the target range.
The space would appear to be there for the committee to contemplate a 25 basis point rate cut this week. There would be a case for it to feed into a virtuous cycle of political optimism, improved confidence and better growth and jobs prospects with a rate cut that would further lift confidence and take the pressure off consumers.
The case for caution is, if anything, as great as before. One issue is that the inflation outlook is not as rosy as it was before the budget, with the hikes in VAT, fuel and excise taxes set to drive inflation up again in 2018.
Theoretically that’s a once-off hit and the committee could see through it, but inflation expectations are still high and the committee has said it is reluctant to cut interest rates unless it sees lower inflation expectations and inflation forecasts that are closer to 4.5%.
But what it will surely flag is that the biggest risk to the rand and to inflation is external: with the US Federal Reserve raising rates amid rising inflation and better growth, emerging-market economies could yet feel the fallout just as they did in the 2013 "taper tantrum".
The most vulnerable economies are those with large current-account deficits and others have seen sharp drops in their currencies since January. SA has been spared only because of its better political outlook. But the risk to the rand persists and the committee could pause a bit longer before the next rate cut.