JOHANNESBURG - International rating agencies on Friday spooked the rand after Moody’s and Fitch weighed in on the medium term budget policy statement (MTBPS) delivered this week, expressing their displeasure with Moody’s Investor Services particularly scathing.
Moody’s said that the policy statement was credit negative.
Moody’s is the last of the “big three” international agencies to rate South Africa’s long-term foreign-currency debt at investment grade.
The rating agency further said government debt was now “likely to stabilise later and at a higher level than we previously expected."
The rand depreciated to R14.72 against the dollar, from the R14.56 it was bid at in overnight trade before the rating agencies comments filtered through the markets.
“The rand is once again stumbling on the back of comments by credit ratings agency Moody’s. Moody’s announced that the fiscal outlook for the country is dire, and could impact negatively on the embattled economy,” said Bianca Botes, an analyst at Peregrine Treasury Solutions.
Fitch also expressed its disappointment at finance minister Tito Mboweni maiden policy statement which showed a ballooning debt. The agency warned that the budget policy statement did not contain significant offsetting fiscal measure and that the country’s debt would take a while to stabilize.
Jon Friederich, a sovereign’s director at Fitch said he believes spending overruns will continue to be met by re-allocations so that expenditure ceilings are respected.
“The evolution of fiscal policy in response to the recession and political and social pressures will remain an important part of our sovereign rating assessment,” Freiderich said.
Fitch in June affirmed South Africa's junk status with stable outlook. The MTBPS showed that the country’s gross debt in the fiscal year 2020/21 will be 57.4 percent of the gross domestic product rather than the 56 percent projected in February. Mboweni has already warned that if the debt hit 60 percent of GDP, the country would be forced to seek help from the International Monetary Fund.
John Ashbourne, an economist at Capital Economics, said the lack of further austerity at this week’s budget statement will have a small effect on short-term growth.
“Mboweni’s decision to run a wider budget deficit in 2019 rather than cut spending to meet deficit targets shows that the government is prioritising boosting growth over limiting the rise in debt,”Ashbourne said.
Meanwhile, Fitch removed power utility from its “rating watch negative” list, slashing the risk Eskom’s credit rating being cut to Fitch’s fourth tier of junk in the near future. However, the power utility’s credit rating remains BB- with a negative outlook.
Eskom chief executive Phakamani Hadebe said the ratings action was an affirmation of extensive measures that have been implemented by the company’s leadership.
“This reflects the start in our journey towards restoring financial health, however the road ahead will be tough,” Hadebe said.
“Eskom remains a vital contributor to ensuring that South Africa’s economic growth targets are achieved and ensuring the security of supply remains one of our key priorities”.
The company said it was confident that it will successfully execute the remaining funding requirement through various sources including committed development finance institutions, local debt capital markets, export credit agencies and other funding structures.