Sifiso Skenjana | Now, more than ever, Moody's downgrade looms
The coronavirus pandemic, ballooning government debt levels, joblessness, the economic recession, geopolitical tensions, Eskom's erratic load shedding, the stifling of SAA's business rescue process and unions waging war against public sector wage commitments from the budget speech: all of this adds up to a perfect recipe for Moody’s to officially downgrade country's sovereign debt rating to junk status later this month.
Earlier in March, the World Health Organisation officially declared the coronavirus outbreak a global pandemic. This was while the largest global economies were scrambling to shore up their markets, with the US Federal Reserve Bank and the Bank of England convening emergency meetings that saw them reducing their interest rates by half a percentage point (50 basis points). For the Bank of England, it would be their first emergency rate cut since the global financial crisis. The US would declare another emergency interest rate cut, to near zero, on the weekend. US president Donald Trump has further declared sweeping travel bans, which would also apply to cargo coming from Europe into the US.
If the impact this instability had on global markets were not enough, the Saudi and Russia oil price wars escalated, as Saudi Aramco committed to boosting oil supplies to a record level of 12.3 million barrels per day in April – this is roughly 3 million barrels per day more than what it was producing before the start of the price war.
While this may be interpreted largely as geopolitical tension, it appears the US shale industry may also be the target in a bid for Saudi and Russia to claw back some market share, given that the US pipped the two countries in September 2018 to become the largest crude producer globally.
Closer to home
Back home, meanwhile, President Cyril Ramaphosa on Sunday night announced decisive measures to control the spread of the coronavirus: declaring a national state of disaster, a travel ban on high-risk countries, banning gatherings of more than 100 people, cancelling large events, the closure of schools, calling upon businesses to ramp up hygiene control, and more. By Monday morning, stocks on the JSE were bleeding heavily.
The combined impact these events have on South Africa - and its prospects of surviving a ratings downgrade - is multifold.
First, the coronavirus pandemic means there will be lower production globally, as factories have closed and more countries are moving to shut down business-productive activities. This is the supply side impact. There will be fewer produced goods as result. Factory output numbers are at record lows globally and locally.
On the demand side, the impact is on sectors like retail, hospitality, tourism, agriculture and business services, where people will be traveling less, eating out less, utilising services that require warm bodies even less.
The third leg of the impact is on investor sentiment.
Furthermore, the impact of the geopolitical tensions results in a "risk off " stance from investors and they run to safe havens of the US dollar and gold. This results in a weakening of the South African currency.
A weaker currency means that we import goods at higher prices. The impact of this is material, given that our imports of goods and services as a percentage of GDP stand at 29.6%, according to the World Bank’s World Integrated Trade Solutions (WITS). This will have inflationary implications that make it difficult for the South African Reserve Bank to continue to apply accommodative monetary policy.
Combined, this suggests that the National Treasury ought to revise its growth expectations below the 0.9% that was presented at the Budget Speech by Minister of Finance Tito Mboweni. We have already seen Moody’s revise its 2020 growth expectation down to 0.4% from an already revised 0.7%.
Added up, this means the few levers the country had at its disposal to avoid a ratings downgrade have been used up. A downgrade is no longer a question of "if". Let us start to plan for an economic reality following a ratings downgrade.
Sifiso Skenjana is the Chief Economist and Thought Leadership Executive at IQ Business. Views expressed are his own. Follow him on Twitter: @sifiso_skenjana