Moody's downgrade 'premature'

2012-09-28 16:11

Johannesburg - Moody's downgrading of South Africa's credit rating is premature but not unexpected, analysts said on Friday.

"A key consideration in determining the rating has to be the conference in December," said Melanie Brown, CEO at Global Credit Ratings.

She was referring to the ruling African National Congress's national conference in Mangaung in December. The conference will elect new leadership and possibly adopt new policies. This would in turn inform government legislation and policies.

"A lot will come from the December conference in terms of policies and change of leadership. This is a key input," Brown said.

Moody's Investors Service's announcement on Thursday that it had downgraded South Africa's government bond rating by one notch from A3 to Baa1 was therefore premature, she said.

However, the move was not unexpected.

"It's not a new form of panic situations, but it does send an important message: we are just not getting our house in order," said Econometrix chief economist Azar Jammine.

Moody's gave three "key drivers" for downgrading South Africa's rating.

One of these was "a decline in the government's institutional strength amidst increased socio-economic stresses and the resulting diminished capacity to manage the growth and competitiveness risks".

South Africa's infrastructure backlog and relatively high labour costs despite high unemployment contributed to the negative investment climate.

It also listed "increased concerns about South Africa's future political stability".

Moody's downgrade brings its rating in line with the other two international ratings agencies, Standard and Poor's and Fitch.

Emerging markets economist with Japanese bank Nomura, Peter Attard Montalto, said although unsurprising, the downgrade had come earlier than expected.

"We thought all agencies would wait till after Mangaung in December, but keep the rating on negative outlook given the possibly 'detrimental' (Moody's word) policy outcomes of that elective conference," he said in a statement.

Moody's was concerned about the uncertainty leading up to Mangaung.

"The rating outlook remains negative because of uncertainty as to whether the policy decisions being devised ahead of the December leadership conference of the African National Congress will be helpful or detrimental to the country's growth and competitiveness outlook."

It said the ANC's recommendations following its June policy conference for "more radical policies and decisive action to effect thorough-going socio-economic and continued democratic transformation" suggested that increasingly interventionist strategies were highly likely.

The ANC this week released recommendations on policy including the rejection of "wholesale nationalisation" in favour of "strategic nationalisation", and "transformative state intervention in the economy".

Moody's said: "To the extent that such strategies would deter private investment and incoming capital to South Africa, they could further diminish its growth potential at a difficult period in the global economy."

Brown said South Africa needed to give investors policy certainty.

"This in turn requires laws and policies that are clear, definite and consistently applied by the current administration and its successor, with any policy changes a result of the shifting economic landscape, so as to maintain stable debt ratios."

She said government should heed the warning given by the ratings downgrade.

"I'd like to think government will see that as a warning, now we need to start getting our ducks in a row."

There was a fear that a change in ANC leadership could impact existing policies, she said.

"In South Africa our politics is really driven by an individual as opposed to party views."

Montalto said the prospect of more downgrades from other agencies was high as wildcat strikes spread through the mining industry and to other sectors of the economy.

"We expect the likelihood of broader downgrades to rise further after Mangaung where the policy direction has the potential to entrench further policies which harm competitiveness like further state involvement in the economy, mining taxes etc.," he said.

"Our original view that a downgrade given a (ANC president Jacob) Zuma victory was more likely than given a (ANC deputy president Kgalema) Motlanthe victory still stands for the other agencies and with respect to Moody's cutting again."

Jammine said South Africa's credit rating was important and cutting the rating reduced the desirability of investing in South African government bonds.

Government issues bonds to finance the shortfall between what it spends and what it receives in taxes, known as the budget deficit. It pays interest on those bonds. The less attractive the bonds are to investors, the higher the interest the government has to offer to make them attractive.

Jammine said the more money government had to spend on paying interest, the less money it had available to spend on education, health, and social welfare, among others.

"Money has been coming into the country at a very rapid rate through the buying of South African government bonds in the last year or two. It's about R10bn to R15bn per month," said Jammine.

"Not only is the money being supplied to enable government to finance its deficit budget but also the money from abroad is very welcome to help finance the shortfall between South Africa's imports and exports."

He said the ratings agencies had earlier warned that they were looking at possibly downgrading South Africa's credit rating because of its inability to deal with unemployment.

The agencies were concerned about a "greater chance that government might feel pressured to embark upon populist policies which would raise expenditure and exacerbate the current account deficit".

"And therefore imply government would have to borrow more than it says it will and that would send government debt to higher levels. And that raises the risk of default on government debt such as we have seen in Greece."

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  • bongani.nsele.58 - 2012-09-28 17:41

    apparantely these days the chinese grading system is more reliant than moody's.....when will moodys downgrade wells fargo?

  • J.Stephen.Whiteley - 2012-09-28 17:54

    Not easily reversed: all the law suits, ANC infighting; motor accidents; orphans; the pot bellied economy, and all the rest and so forth, your Majesty.

  • blip.noodlum - 2012-09-28 23:32

    Rating agencies really don't rate terribly proactively -- they base their ratings pretty much on the here-and-now and, at a stretchy best, the foreseeable short-run future. Ergo, they can't be acting "prematurely", unless there is clear evidence that their short-run predictions are palpably and egregiously wrong.

  • adriaan.kroon.1 - 2012-09-30 06:52

    Its OK they will just TAX us more!! More tax on FUEL, PAYE tax, company tax, compensation tax, compulsory union tax, Sales tax, road tax, license tax, carbon tax, house tax and fricken what next!!!

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