In the past few days there has been a flurry of negative sentiments relating to the South African economy. On September 27, Moody’s downgraded the government bond rating by one notch to Baa1 from A3. Their rating outlook remains negative. Then on October 1, the rating of the five metros of Cape Town, Ekurhuleni, Johannesburg, Nelson Mandela Bay (Port Elizabeth) and Tshwane (Pretoria) along with 12 municipalities were downgraded.
But the SA National Road Agency Limited’s (Sanral) rating remained the same. Moody’s decision to affirm Sanral’s ratings, notwithstanding the sovereign downgrade, “reflects eased concerns over the company’s financial prospects following the recent Constitutional Court decision to lift the embargo on e-tolling operations on the country’s largest toll road project, the Gauteng Freeway Improvement Project (GFIP)”.
On the same day, Moody’s downgraded the senior unsecured bond rating of Eskom by one notch to Baa3 from Baa2. The outlook on the rating remains negative.
On October 4, the downgrading continued with the foreign-currency long-term issuer ratings of two rated development finance institutions, the Development Bank of Southern Africa and Industrial Development Corporation, declining. The negative outlook was maintained on both institutions’ issuer ratings, in line with the outlook on the government bond rating.
On the same day again, we saw the foreign-currency long-term deposit ratings of the five largest local banks being downgraded to Baa1 from A3, due to the revision of the country’s foreign currency deposit ceiling to Baa1 from A3 previously.
Moody’s says these negative outlooks reflect that of the government rating, which signals further downside risks in the operating environment, as well as in the government’s capacity to provide systemic support to the banking system.
So what has caused all these downgrades and the likely downgrades that are coming? Moody’s says: “The main driver for the downgrade of South Africa’s ratings is Moody’s lowered assessment of institutional strength from ‘high’ to ‘moderate’, an important factor in the rating agency’s judgment of a sovereign’s economic resiliency. The revision reflects Moody’s view of the South African authorities’ reduced capacity to handle the current political and economic situation and to implement effective strategies that could place the economy on a path to faster and more inclusive growth.”
This is quite telling of the impact that the current political climate and the economic capabilities of certain people in the civil service has on the country’s outlook. The salaries of civil servants were increased recently, but Moody’s notes that productivity levels did not increase in line with this. They also note that, “the rise in the wage bill and debt servicing costs reduces the amount of resources available for development spending”. The developmental state aspirations are at risk.
The third driver informing Moody’s decision to downgrade the sovereign rating is the more negative investment climate, which has been aggravated in recent years by shortfalls in energy, transportation and other infrastructure, as well as high labour costs relative to productivity.
Overall the rating outlook remains negative in Moody’s view “because of uncertainty as to whether the policy decisions being devised ahead of the December leadership conference of the ANC will be helpful or detrimental to the country’s growth and competitiveness outlook”.
The impact of this is quite immense, because the state’s credit ratings affect all institutions below it in both the private and the public sector.
So what could change the ratings according to Moody’s? Higher domestic savings and investment rates would support a stable outlook as would sustainably stronger growth, restrained debt accumulation and the maintenance of sound economic policies by the current administration and its successors.
The reality of these outcomes happening soon is not likely, so a long-term approach in fixing things has to be taken. The ratings could be downgraded should the government’s debt and contingent liabilities rise further, particularly if the deterioration occurs due to a pro-cyclical fiscal stance and/or heightened socio-political unrest that is not addressed in a manner consistent with future debt sustainability.
The bottom line is: there is no factual and hard economic data that informs the ratings downgrade but leadership and political issues. This points to a lack of leadership on all sides in addressing the issues driving the creditworthiness of the country. How long can this go on before the imminent financial implosion of South Africa?