Can Finance Minister’s honesty warm ratings agencies’ sentiment?
JOHANNESBURG – The spectre of a ratings downgrade of South Africa to junk status by Moody’s Investors Services loomed even larger yesterday, after the markets were left uninspired by Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS).
Mboweni’s candid portrait of the economy sent the rand hurtling against the dollar. It breached the key R15 to the dollar mark, sliding a whopping 39c to R15 by 5pm, compared to the same time on Tuesday.
The rand lost 1.5 percent against the dollar as Mboweni compared South Africa to a winter season, where the ground was dry, emphasising debt is accelerating at an unsustainable pace and the economic landscape is dismal.
Moody’s, the only ratings agency that still has South Africa’s credit rating above junk, is due tomorrow.
Economists and analysts said yesterday that while Mboweni’s openness about the problems faced by the economy and his consequent suggestions on cost savings of R50 billion a year for the next three years were commendable, there were no concrete answers on fixing the medium-term position, which was worse than had been anticipated. “The fiscal position has worsened significantly since February, a fact that Moody’s will frown upon,” said Peregrine Treasury Solutions in its commentary.
Audit firm PricewaterhouseCoopers (PwC) noted that the MTBPS’s downward revision on economic growth and upward revision in planned state lending would push Moody’s debt metrics beyond critical levels, leading to a downgrade to non-investment grade if the agency wanted to maintain its integrity.
“The MTBPS admits that since the Budget Speech 2019, risks of further sovereign ratings downgrades have increased due to low economic growth and rising public debt. The latter is a crucial issue. Moody’s already has a bloated view of the country’s public debt after recently adding Eskom’s government-guaranteed debt obligations to those of the sovereign,” PwC said.
“The only immediate lifebuoy would be if the agency latches on to the multiple promises of change to be revealed in February 2020,” PwC said.
Speaking yesterday prior to the MTBPS, SA Reserve Bank governor Lesetja Kganyago said the outcome of the country’s rating was in the hands of policy makers.
“We should not be sitting here and waiting for Father Christmas. The rating process is the outcome of an assessment of the policy choices that the government makes,” he said.
“All that the ratings agency does is to assess whether based on the policies you have adopted, you will be able and willing to repay the debt that you raised, and based on that they decide to give you top notch rating or you get a lower rating,” he said.
Kganyago explained how a Moody’s downgrade would affect the country’s liquidity status as the cost of raising debt would rise, even prompting the bank to review the monetary policy when it comes to interest rates.
“Our view is that South Africa will be downgraded to junk status, but only in 18 months to two years time, not next year as I earlier indicated,” FNB analyst Wayne McCurrie commented.