Rating agencies to keep keen eye on SOE funding

Johannesburg – Rating agencies will be keeping a close watch on how Finance Minister Pravin Gordhan will be funding state-owned enterprises (SOEs).

This is according to a preview on the National Budget by Craig Pheiffer, chief investment strategist for Absa stockbrokers and portfolio management.

Rating agency Moody’s recently kept South Africa’s credit rating two notches above sub-investment grade with a negative outlook at Baa2. Fitch kept the sovereign rating at BBB- but downgraded the outlook to negative and Standard & Poor’s (S&P) also kept the rating one notch above junk with a negative outlook.

Fitch and S&P both raised concerns over the financial state of SOEs.

In its commentary, S&P stated that South Africa’s contingent liabilities were however limited and that government faced risks from non-financial public enterprises with weak balance sheets. These may require more government support and include the likes of Eskom, national roads agency Sanral and South African Airways (SAA).

Fitch raised concerns over SOEs remaining a contingent liability to the sovereign. Debt of the nine major SOEs amounted to R743bn or 18.2% of GDP at end-March 2016. Of this, R280bn was subject to government guarantees, said Fitch.

Pheiffer said that market watchers would be focusing on announcements in Gordhan’s budget that could possibly sway views by rating agencies. These areas include the medium term view of the sovereign debt level, the budget balance and economic growth.

The widening of the budget deficit, or fiscal slippage, or greater debt levels than forecast in the mini budget could also be “negatively received” by S&P and Fitch, said Pheiffer. Their ratings are each one notch above junk and a negative move could see a downgrade, he explained.

The mini budget reflected a “weaker fiscal position” than that presented in February 2016, and the markets have already been “sensitised” to the slippage, he said. A boost in personal income tax is likely to prevent further fiscal slippage in the midst of a slow growing economy.

“Any additional credible growth initiatives would also be very well received and overall there is a scenario where SA could escape a rating downgrade once more,” said Pheiffer. 

“One could debate whether or not the current rand to dollar exchange rate is pricing in a rating downgrade but bad news from the budget could see a weaker rand both in the short and long-term, especially if it does lead to sub-investment grade status,” he said.

Absa projects an exchange rate between R13/$ and R14/$ range. A year-end exchange rate closer to R14/$ is expected. Further, a weaker currency would have consequences for inflation, he added. 

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