Publications
Partners
Johannesburg - The Moody’s downgrade of South Africa’s investment grade credit ratings to Baa2/P-2 from Baa1/P-2 will pour cold water on the warm post mini budget glow, according to emerging markets economist Peter Attard Montalto of Nomura.
"What it suggests is that the warm feelings of conservatism after the mini budget were really the high water mark for 'as good as it gets'," Montalto said on Friday.
In his view the move lower is no surprise in itself. Moody’s has for some time now both stuck out against the other agencies and been highlighting the weak structural position of the sovereign.
"However, the timing is a bit of a surprise. We had thought Moody’s might give the sovereign the benefit of the doubt around the mini budget and wait until after the February budget to downgrade," said Montalto.
Overall, though, Nomura thinks the market, and particularly bond fund investors, were braced for a downgrade and so it should not be too much of a surprise.
Montalto said the move is interesting because Nomura thinks Treasury attempted to craft the mini budget precisely to try and avoid a downgrade from Moody’s.
Finance Minister Nhlanhla Nene delivered his first budget address - Medium Term Budget Policy Statement, commonly known as the mini budget - on October 22.
VIEW: Mini Budget Special
"However, the number of concerns for the agency as well as the risks around the mini budget meant such an effort was clearly not successful," he said.
"What seems to have tipped Moody’s over the edge is a marked revision down in its framework for both the growth outlook and potential growth estimates, which made the credit profile more problematic."
The limit of the benefit of the doubt the rating agency gave to the National Treasury came in the form of the revision of the outlook to neutral from negative, in Montalto's view.
Moody’s particularly highlights the effects on growth of structural weaknesses, energy shortages, deteriorating investor climate and less supportive capital market environment globally for deficit countries as the key reasons for the downgrade – as well as the fact that even strict compliance with the mini budget would still result in rises in debt to the gross domestic product (GDP).
"We think the move was justified for the reasons Moody’s gave. What we find slightly odd about Moody’s update is its strong appeal to the National Development Plan (NDP) as a medium-run anchor - though it admits unproven - for reform to lift structural weaknesses and potential growth – and so one would presume a floor on the rating," said Montalto.
Nomura recently expressed profound doubt at the NDP being a “real” policy document that had real leadership around it to solve South Africa’s problems.
Nomura now expects Fitch to downgrade at its next update in December.
READ: Rand under pressure after Moody's downgrade
Treasury reacts
The National Treasury said it has taken note Moody’s decision to downgrade South Africa’s investment grade credit ratings to Baa2/P-2 from Baa1/P-2.
"Government recognises that economic growth has slowed down and there is a need to implement growth-inducing initiatives," Treasury said in a statement.
"The Medium Term Strategic Framework prioritises initiatives that will boost investment, including major projects in rail, energy and ports. Furthermore, focus in the medium term will be on accelerating the structural changes that are already underway and whose impact will support economic growth."
Treasury said the ratings agency’s decision to assign a stable outlook to the current ratings affirms government’s commitment to fiscal discipline, which was reinforced by the mini budget (Medium Term Budget Policy Statement).
"Government is committed to narrowing the budget deficit, stabilising debt and rebuilding the fiscal space that enabled South Africa to escape the worst effects of the global economic crisis," according to Treasury.
"Prudent macro-economic policies have been the hallmark of South Africa since the dawn of democracy. Government will continue to make the tough decisions that are necessary to address our challenges so we can build on the gains we have made over the past 20 years to improve the lives of our people."
- Fin24
