JOHANNESBURG - South Africa might have narrowly dodged a bullet in escaping a downgrade to junk status by Moody’s Ratings Services last week, but the bond and currency markets have largely priced in this risk already and were trading as if SA were a fully-downgraded country analysts said over the weekend, unanimously warning of a definite cut next year.
This is as the focus on South Africa’s well-being and possible remedies shifts to the Budget Statement by the Minister for Finance Tito Mboweni in February, which should determine the fiscal policy acrobatics necessary to avoid a downgrade to junk status.
The weak economic environment, a further revenue shortfall and additional funding requirements by state-owned enterprises meant the National Treasury was always going to have to report further fiscal slippage. However, the extent of deterioration announced by Minister Mboweni on October 30 exceeded all expectations.
“Over the next few months, unless the government either implements growth-oriented policies or takes hard decisions to bring down the debt-to-GDP ratio, it is likely that there will be a full downgrade,” said Stanlib’s head of Fixed Income Victor Mphaphuli, noting that after the MTBPS, bond markets and the rand reacted sharply, because it was evident that South Africa ran the risk of a full downgrade from Moody’s.
Chief Economist at Stanlib Kevin Lings agreed that at this stage, the chances of Moody’s downgrading South Africa's credit rating to below investment grade in the first half of 2020 are well above 50 percent, and such a move would indicate that Moody’s sees SA as a greater financial risk than it did in 1994 when giving our first Baa3 rating.
“Moody’s thinks there is a material risk that the government will not succeed in stopping the fiscal deterioration. They are very critical of the government's ability to implement reforms. Expect a full downgrade to junk next year,” he said in his Twitter feed.
Business Unity South Africa, through its chairperson Sipho Pityana, said that it was concerned that the government would not sufficiently heed the 18-month warning it had just received to get the economy in order.
This is obviously going to be made even harder by the consistently negative ratings from all the agencies - so funding the debt mountain at state owned enterprises is going to become even more expensive.
“This development also, unfortunately, revives the conversation about the possibility of a bail-out from an entity like the IMF - and punishing austerity measures, which we have warned about in the past, that would have drastic consequences on our nation,” Pityana said.
Head of capital markets research at Intellidex, Peter Attard Montalto, said that given that there would be insufficient progress on fiscal consolidation in February (on the wage bill in particular), there is now a significant chance of a downgrade in March.