ASHA SPECKMAN: Moody's still sees a silver lining, but for how long?

07 April 2019 - 00:08 By

SA is like the proverbial cat with nine lives when it concerns Moody's - the international credit ratings agency that refuses to send our rating to junk status.
Just over a week ago Moody's kept us on the edge of our seats as we nervously awaited our fate. Even if the agency was not going to lower SA's remaining investment-grade status to junk, some economists were confident it would downgrade the rating outlook to negative from stable.
A ratings downgrade would be disastrous, especially at a time when rising fuel and electricity prices are set to add several hundred rands more to household expenses in coming months and wage increases are not mirroring the rise in costs.
Mercifully, the Reserve Bank is expected to keep interest rates steady for this year and into next year, but a downgrade could alter that. The cost of borrowing internationally and domestically would increase for the government, consumers and businesses.
The central bank would have to hike rates to tame any runaway inflation as a result of a hammered rand.
But a ratings downgrade of SA's remaining investment-grade status could send a wake-up call to the government to prioritise the economy above politics. It could spur them to up the ante on the slowly grinding wheels of reform.
After all, some of the reforms necessary are what ratings agencies have highlighted for years, but there has been little progress from the government to effect these reforms.
S&P Global Ratings and Fitch Ratings lost patience years ago: they downgraded SA's rating to junk in 2017.
Moody's is still seeing the silver lining. But for how long? In a credit opinion this week they make it clear what moves are necessary to avoid a junk rating.
These include the successful implementation of reforms, such as in education and the labour market, to raise growth and eventually reduce government debt. Likewise, overhauling state-owned companies to cut their debt would be another positive move.
Conversely, SA's ratings would be downgraded if government debt and the contingent liabilities risk from state-owned entities continue to rise to levels that are not consistent with an investment-grade rating. And if medium-term growth persists at very low levels, such as last year's 0.8%, the rating will also be at risk.
In this year's budget review, the National Treasury highlighted the deteriorating finances of state-owned companies and the strain this has put on public finances.
The contingency reserve was revised upwards by R6bn in 2019/2020, which is a sign the Treasury is expecting the finances of the likes of Eskom to get worse before they improve.
There are clear grounds to downgrade SA, but there is also a direct message from Moody's about what SA needs to do to avoid a downgrade. The problem is that it's a tall order for a government consumed by toxic politics.

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