Credit rating: Is that a glimmer of hope I see?

07 May 2016 - 15:05 By RAY HARTLEY
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Finally, a tiny glimmer of hope for South Africa’s credit rating.

Ratings agency, Moody's, were impressed with Finance Minister Pravin Gordhan’s budget and the medium term fiscal plan which, they said, “will likely stabalise and eventually reduce the general government debt metrics”. Moody’s announced on Friday 6 May 2016 that it has retained South Africa’s investment grade rating, qualifying this with reservations about government’s ability to implement its plans.
Ratings agency, Moody's, were impressed with Finance Minister Pravin Gordhan’s budget and the medium term fiscal plan which, they said, “will likely stabalise and eventually reduce the general government debt metrics”. Moody’s announced on Friday 6 May 2016 that it has retained South Africa’s investment grade rating, qualifying this with reservations about government’s ability to implement its plans.
Image: TMG

Let’s be absolutely clear: it is just a glimmer and it comes from an agency that has decided to place the country on a negative outlook.

The agency, Moody’s, has announced that it has retained South Africa’s investment grade rating, qualifying this with reservations about government’s ability to implement its plans.

  • We're winning the battle, says Treasury after Moody's blowSouth Africa’s National Treasury insisted on Saturday that the government was bringing public finances under control despite recent “adverse political developments”.  

First, let’s get the negative outlook out of the way. The agency said this was necessary because of “the implementation risk associated with the structural and legislative reforms that the government, business and labour recently agreed in order to restore confidence and encourage private sector investment”.

Decoded, this simply means that Moody’s like what was said, but wants to see some action and the track record for action is not good.

Back to the glimmer of hope. What is gratifying is that Moody’s believes that “the country is at a turning point after several years of falling growth.”

They were impressed with finance minister Pravin Gordhan’s budget and the medium term fiscal plan which, they said, “will likely stabalise and eventually reduce the general government debt metrics”.

Moody’s observed that several “supply side shocks” which had hit the South African economy were receding.

Among the diminishing problems was electricity supply which “is now more reliable”; the drought, which was ending and a decline in the number of work days lost to strikes.

In addition, inflation appeared to be under control, reducing the chance of interest rate increases.

The decision by Gordhan to go on a global roadshow with business and labour after the budget speech appears to have paid off.

The agency referred to “recent political developments” as “disruptive”, but added that these “testify to the underlying strength of South Africa’s institutions.”

  • Chance of a downgrade in June‚ but December more likely – economistThere is a chance of South Africa being downgraded by Standard & Poor’s in June‚ but December is more likely‚ according to Nomura International economist Peter Attard Montalto. 

Deeper in the report, Moody’s explains what it means, referring to two recent events: The crisis of the firing of finance minister, Nhlanhla Nene, in December last year and the recent court rulings affecting President Jacob Zuma.

On the first issue, Moody’s said: “The reappointment of a respected former finance minister to the post following the intervention of the ANC leadership late last year, along with the more ambitious budget that the minister tabled in February, demonstrated determination to bring the public finances under control.”

On the second, it stated: “In Moody's opinion, the Constitutional Court judgment against the president over the misuse of public funds and the parliament for rejecting the ruling of the public prosecutor and, more recently, the High Court ruling to reinstate corruption-related charges against the president that were dropped prior to his taking office in 2009 attest to the strength and independence of South Africa's constitution and judicial system.”

While we should not get too excited – the agency predicts that growth for 2016 will come in at only 0,5% - the outlook appears to be finally turning positive. It sees 2017 growth at 1,5%.

  • Gloom and doom as junk status loomsIt seems it is just a matter of time before South Africa's credit rating is cut to junk. 

The agency also sees government’s debt to GDP ratio stabilising in this fiscal year and observes that: “For the first time since the global financial crisis, the government has pledged to achieve a primary surplus on the consolidated government account in 2016/17, as well as in the main budget the following year, with surpluses scheduled to grow each year thereafter.”

It went so far as to state that “the government's recent track record of achieving fiscal targets lends weight to their future plans.”

So there is some good news.

But, there is an important caveat. The agency also warns that the rating could be revised downward “if economic growth were to fail to revive, if we were to conclude that the government's determination to stabilize and then improve its debt metrics was likely to falter, or if investor confidence were to decline by such an extent that external financing was insufficient to fund the current account deficit on an extended basis.”

- RDM

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