Johannesburg - As representatives of Moody’s Investors Service arrive in South Africa this week ahead of the agency’s decision on the country’s rating, economist Iraj Abedian has warned that the move should not distract the country from a bigger threat – the possible downgrade to subinvestment grade in two months.
Standard & Poor’s (S&P) and Fitch are due to hold their next ratings review on South Africa in June. Moody’s, which last week placed the country on review for a downgrade, will be visiting South Africa for its annual review between March 16 and 18.
Read: Rand shivers after notice from Moody's
“Moody’s visit to South Africa and a possible downgrade is a sideshow. At the moment Moody’s is behind the curve compared to the other agencies. So that should not distract us from the real threat,” Abedian said on Saturday.
At Baa2, Moody’s rates South Africa’s debt one notch higher than fellow agencies S&P and Fitch. A Moody’s downgrade will put the agency in line with its peers, which is just one level above “junk”.
“Junk” status will have devastating consequences for the country’s credit worthiness. Professional investors, such as hedge funds, pension funds and asset managers are prevented from investing in junk countries. South Africa’s BRICS peers, Brazil and Russia, lost their investment grades last year.
Finance Minister Pravin Gordhan last week embarked on a road show to the UK and US to convince investors about the country’s plans to grow the economy, create jobs and lower the budget deficit. Gordhan will hold a news briefing today around the road show.
“Gordhan has played his part. But he cannot do the whole job by himself. His cabinet colleagues should also rally around him. There are two things South Africa should deal with urgently. The first is political uncertainty… and this has to do with the changing of (finance) ministers, issues of governance and SA Revenue Service (Sars),” Abedian said. Gordhan has recently been embroiled in a spat with Sars Commissioner Tom Moyane.
Secondly, Abedian said, the government should facilitate economic growth by encouraging private sector participation in the economy. “We have roughly two months to deal with those issues. The Minister of Finance has done his best. We need to see urgency. For instance President Jacob Zuma seems to be dragging his feet in dealing with the Sars matter. It is not business as usual,” he said.
Review
Following its decision to place the country on review, Moody’s on Friday also put several South African companies and public entities on review for a downgrade. These include the ratings of the Industrial Development Corporation of South Africa and the Development Bank of Southern Africa.
“(The) rating action reflects the increasing risk of a weakening capacity of the South African government to support these institutions in case of need, as captured by the recent rating review for downgrade of South Africa’s government bond rating of Baa2,” Moody’s said.
The agency also put on review for a possible downgrade ratings of Old Mutual Life Assurance, Old Mutual Wealth Life Assurance, Old Mutual and Transnet.
Econometrix chief economist Azar Jammine said on Friday: “This is a normal action when the country’s rating is on review. As is the case with the country, a downgrade will mean that cost of credit will be more expensive for these companies and entities. This is when you see the real cost of Zuma’s actions.”
Jammine was referring to the quick succession of finance ministers in December, which had rattled financial markets.
Reuters reports that an expected cut in South Africa’s credit ratings to “junk” grade is already being priced in.
South African dollar debt trading in JP Morgan’s emerging markets bond index (EMBI) is already yielding more than that of countries with similar credit ratings.
South African bonds in the EMBI global index were trading at a premium of 410 basis points (bps) over US treasuries on Friday, while Russian bonds traded at just 274bps.
The cost of insuring South Africa’s debt against default has also leapt, with its five-year credit default swops trading at 318bps on Friday, according to Markit, versus 289bps for Russia and 258bps for Turkey.
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