EDITORIAL: Moody’s may not be as accommodating this time
The credibility of the Treasury team is what still stands between SA and a credit ratings downgrade to full junk status
The one thing that still stands between SA and a credit rating downgrade to full junk status is the credibility of the Treasury team. Whether that would be enough to sway Moody’s — the only one of three credit ratings agencies that still has SA on investment grade rating — remains to be seen. Moody’s has always been more accommodating of SA, on numerous occasions seemingly going out of its way to give us a break.
That, however, may be about to change. In a rather pointed statement on Thursday, the agency made clear its concerns on the budget presented by finance minister Tito Mboweni the day before.
Moody’s pointed at many areas of concern about the budget.
In particular Moody’s is concerned about the slow economic growth, the R69bn bailout to Eskom, and the resultant breach of the expenditure ceiling.
SA will also record a fiscal deficit of 4.5% of GDP, up from 3.6% in the 2018/2019 budget. The “persistent financial stress at state-owned enterprises” is also of great concern for the agency.
We’ve arrived at this point courtesy of the rampant public sector corruption and the deliberate weakening of state institutions that has gone unpunished.
While Moody’s expects new electricity tariff increases to be announced by regulator Nersa ahead of its rating decision by the end of March, the agency only expects “additional cost-cutting measures at Eskom will likely take place after the elections in May”.
Notably, Moody’s only points to three positives from Mboweni’s budget: SA’s long track record of adherence to its spending ceiling and the transparency surrounding the breaching of this ceiling in the budget for the first time.
The other positives Moody’s pointed out were Mboweni’s promise to reduce expenditure on civil servants, thereby saving R7bn, as well as plans to sell off about R7bn worth of government financial stakes in companies. This would raise funds equivalent to 0.1% of GDP.
While the agency is confident the higher expenditure limit will not weaken fiscal policy credibility, it is nevertheless concerned the mitigating factors above will be sufficient to compensate for the revenue shortfall and the bailout to Eskom.
This begs the question whether Moody’s will again put its rating decision on hold until after the elections in May to see if the resultant administration will follow-up on the restructuring promises made ahead of the vote.
This Moody’s has done at least twice in the past, including putting its ratings decision on hold ahead of the ANC electoral congress in 2017 to see what kind of leadership would emerge from the conference.
When Cyril Ramaphosa emerged victorious and went on to replace Jacob Zuma as state president, Moody’s announced it was not downgrading SA’s sovereign credit rating to junk status. Instead it revised its credit outlook to stable from negative.
Therefore, if the agency is consistent, it will wait for the May elections to see whether Ramaphosa obtains a popular mandate to forge ahead with the reforms.
Should the agency decide not to wait, SA may find itself languishing in junk status by all major ratings agencies. That would be a huge and damaging setback for an economy heavily reliant on the capital markets to finance about a third of the government’s expenditure.
SA’s sovereign bonds would be kicked out of the major bond indices, raising the cost of borrowing significantly. Most fund managers would be forced to pull their investments from SA.
Of course it is none of the rating agencies that have put SA in this dismal state of affairs. We’ve arrived at this point courtesy of the rampant public sector corruption and the deliberate weakening of state institutions that has gone unpunished.
However, a ratings downgrade at this juncture would serve no good. Certainly not before major and fateful elections that may well deliver a resounding mandate for reform. And Moody’s surely understands this!