Ferial Haffajee: Five reasons why Moody’s is unlikely to 'junk' SA - and why it still could

Moody’s Investor’s Services was in Johannesburg this week for its annual conference on sub-Saharan African economies but ears were really pricked for its view on South Africa as it is last of the big three rating agencies to hold the sovereign rating at investment grade. A decision is expected before the end of the year.

South Africa currently has a Baa3 rating, the last rung before sub-investment grade rating or “junk” status. Moody's maintains a "stable outlook" on this rating. Usually it would to lower the outlook to "negative" before cutting a rating.

But while the agency said that its stable outlook on South Africa was unlikely to result in a downgrade when it makes its next decision, it had in rare occasions moved from a stable position to a downgrade, although this is not the natural trajectory of rating decisions. 

Moody's analysts said that glass-half-full and glass-half-empty analyses could be made of South Africa.  If the glass is half-empty, then uncertainty is the biggest tick against the country holding its investment grade.  

Five reasons Moody’s would be unlikely to downgrade:

1. Growth slow but heading in the right direction

While growth is weak, Moody’s Investors Services expects an uptick in 2019 and firmer growth in 2020, although it has downgraded expectations for 2019 to 0.7%.  Growth expectations are still, however, modest for the short to medium term.

2. A reform-minded government

At the political level, Moody’s vice-president for sovereign ratings Lucie Villa says South Africa has a reform-oriented executive. “In terms of reforms, there are positive signs on economic governance issues,” said Villa.  She added that the agency sees prospects for improvement.  Villa said South Africa is of relatively low political risk. 

3. Support for Eskom

Government’s support for Eskom will help to stabilise its debt, but the utility is still in a “very challenging position”, said Joanna Fic, Moody’s vice-president for infrastructure. “There is a plan being worked on; (but there is) uncertainty about when the plan will be implemented,” she said.  

4. Good quality debt

South Africa has a lot of debt, but it apparently is debt of good quality. This is because debt maturity levels are much longer – at an average of 13 years, while the debts are also in rands (not dollar), which also works in South Africa’s favour, said Villa. The big difference compared with countries like Argentina (recently downgraded to sub-investment grade by Moody’s) is that South African debt does not have the foreign currency risk.   In addition, South Africa has sufficient foreign currency reserves and the Constitution is well protected, said Villa, but she warned “South Africa is at risk to any perception of political interference with the SARB (South African Reserve Bank).” 

While Moody’s last year set a threshold of debt to GDP levels at 60%, this year it did not do so because its projections show that debt is likely to begin tapering down.  Moody’s worst-case scenario for government debt is at 70% to GDP; while its present best-case is 65%. 

5. Strength of institutions

Moody’s MD of sovereign risk, Marie Diron, said the strength of South African institutions continued to count in its favour. 

Five reasons Moody’s could downgrade

1. Growth prospects are too uncertain

“The external environment is not supportive of (growth in) South Africa and emerging markets. It is much worse than expected,” Diron said.  She added that there are socio-economic constraints to give proper momentum to reforms being undertaken by President Cyril Ramaphosa.  These included high unemployment and inequality. 

2. Eskom’s restructuring plan is uncertain

A recurrent theme in Moody’s analysis of South Africa is that while the reforms are regarded as positive, their outcomes are much less certain. This is the case with both the Eskom restructuring plan as well as the National Treasury’s recent growth paper. It was published last month by Finance Minister Tito Mboweni to a reception by the governing party’s political alliance partners that veered from tepid welcome to open hostility. 

Moreover, Fic said that “the situation at Eskom has deteriorated. Last year was particularly challenging with Ebitda down 30% while debt spiked to over R440-billion at the beginning of March 2019.  (Its) capital structure as a standalone is unsustainable (and this) has implications for the government. It’s not an easy situation to face. It’s a very difficult situation.” 

3. Policy is still too uncertain

While Moody’s welcomed the reform trajectory of Ramaphosa’s administration, the rating agency said: “There’s still uncertainty and lack of clarity on what they should be doing.”  Diron said it was not clear if the administration, however well-intentioned, was capable of implementing its agenda. 

4. Too much debt

“South Africa has a snowballing debt effect. The only way to cover interest payments is to build debt. South Africa has not registered a primary surplus since 2009,” said Villa.  She outlined various fiscal factors where spending was headed north instead of south and she highlighted the state’s wage bill as a key driver of debt.  While the 2019 budget had made assumptions of lower headcount, this had been built into the fiscal model. 

5. SARS reform is complex

The Moody’s analysts repeatedly pointed out that the reform of SARS was proving more complex than initially thought. “The low growth environment makes the task of SARS more complex,” said Villa in relation to revenue collection which is lower than targeted.