EDITORIAL: A small window for confidence building
Market was expecting the worst from Moody’s, so there’s no time to relax before February
Judging by the reaction on Monday, it would seem like investors in the currency and bond markets were braced for the worst.
News that Moody’s Investors Service decided to spare SA and not remove the crucial investment-grade rating should ordinarily have been in the price, because the consensus was that it would do exactly that.
It also wasn’t a surprise that the country’s outlook was changed from stable to negative, in theory giving SA an 18-month window to get its fiscal house in order.
If anything, the tone of Friday’s statement implied that there was even less room for error, emphasising the need to see concrete signs on boosting the economy and reining in spending by the next budget, which is normally released in February.
This might have been read as a sign that the downgrade, which would mean that SA would be rated “junk” by all three major companies, could come as early as the first quarter of 2020, resulting in capital leaving the country as SA bonds fall out of key indices that foreign investors use as benchmarks. According to Bloomberg, Bank of New York Mellon predicted that such an event would lead to as much as $15bn in outflows.
Considering the size of our economy, that is a huge amount, which could cause massive disruption, rand weakness and higher bond yields. That would translate to even more of the budget being eaten by debt service costs, meaning less money to invest in infrastructure, health and education.
The drop in yields on the R186 bond on Monday was the biggest since January, while the rand gained the most in three weeks. The only way to read this is that despite the consensus view there was a significant portion of the market that had no confidence that we would dodge the bullet and was therefore positioned for a surprise downgrade and consequent sell-off.
This is the lack of confidence that President Cyril Ramaphosa needs to deal with. The recovery in the markets, which may not last, should not be seen as a reason to relax.
Fresh from his trip to Japan, where he saw the Springboks conquer the world, Ramaphosa has another opportunity to tell a positive story about SA when his second investment conference kicks off. The inaugural conference, held in 2018, was successful enough, with more than $20bn of investment commitments.
Sceptics might respond by saying commitments are one thing, but what about the actual delivery?
Government data as of August paints a rather surprising positive picture, with about $17bn of the 2018 commitments in the implementation phase. Data from the UN Conference on Trade and Development (Unctad) showed that SA received R104bn in foreign direct investment (FDI) in 2018, a 446% increase on 2017. This, of course, was flattered by the dismal performance in the Jacob Zuma era.
It was perhaps symbolic of the year that SA is having that the media conference held by trade & industry minister Ebrahim Patel and Trudi Makhaya, economic adviser to Ramaphosa, to launch this year’s investment conference was overshadowed by Eskom, which had once again plunged the country into darkness.
Like Moody’s, investors this week will want a clear message from Ramaphosa that the government is ready to do what it takes to address constraints to growth and confidence. And Eskom has to be at the top of that list.
There can no longer be any denialism about the sorry state of government finances, and Ramaphosa’s message on this has to echo that of his finance minister and indicate a sense of urgency that has so far been missing.
The sooner we can get government finances into shape, the sooner the public sector can also play its role. With the focus on the medium-term budget policy statement, it’s no surprise that Stats SA’s report on capital expenditure by the public sector went almost unnoticed. It didn’t paint a pretty picture, with expenditure by public sector institutions decreasing 8%, or R22bn, to R250bn in 2018.
It’s more than slightly ironic that while Ramaphosa is extracting promises and money commitments from private businesses, the state has had to slash investments. That can change in the future only if the government takes the tough decisions today.