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'Hit' on SARB erodes SA's institutional framework, warns Moody's

Sep 13 2017 13:52
Lameez Omarjee

Johannesburg – The strength of South Africa’s institutions has historically made a positive contribution to its credit strength as recognised by rating agency Moody’s. However, these institutions have recently been tested and this has eroded their strength, a spokesperson said on Wednesday at the rating agency's Sub-Saharan Africa Summit.

Zuzana Brixiova, vice-president and senior analyst of the sovereign risk group, explained that South Africa scores moderately across the rating agency’s measures.

Moody’s methodology to determine a sovereign’s credit risk focuses on the strength of a country's economy, its institutional strength, fiscal strength and the risk of a sudden event. South Africa’s current rating is one rung above sub-investment grade at Baa3, with a negative outlook.

“South Africa is well balanced. Everything is in the range of moderate. There is no particular strength that stands out, and no particular weakness.”

Historically institutional strength was a more distinguished feature but it has deteriorated given recent events, she said. Brixiova referred to the South African Reserve Bank (SARB) which has had its constitutional mandate tested by the Public Protector, as well as talks of changing its ownership by politicians coming to the fore.

But the gradual erosion of the institutional framework is a new weakness, and Brixiova emphasised that these institutions still remain strong despite the challenges. 

SARB targeted

Brixiova explained that the SARB has been performing well in its mandate to ensure price stability. “That mandate is a precondition for macro-economic stability and a condition for growth.”

Questions of its ownership and the nationalisation of the entire financial sector ahead of the ANC elective conference are also to be measured against the extent to which this will impact economic growth, she explained.

The Reserve Bank won a court bid against Public Protector Busisiwe Mkhwebane, who had ordered a change of its consitutional mandate from protecting the value of the currency to promoting the socio-economic wellbeing of citizens.

A supplementary affidavit recently filed by the SARB stated that Mkhwebane had consulted with the Presidency and the State Security Agency about having the mandate changed. The Public Protector will respond to these accusations in an affidavit yet to be filed.

Other weaknesses identified by Moody's include low growth and high unemployment levels. Structural bottlenecks also persist. These, for example, include the mining sector regime, infrastructure reforms as well as the predictability and stability of reforms at state-owned enterprises (SOEs).

The accumulation of public debt and growing government contingent liabilities also remain risks. Debt has more than doubled since 2008, said Brixiova. This is important to note as historically, economic growth was a strength for the rating that has gradually deteriorated.

SA’s strengths

“Having said that, South Africa still has strong institutions compared to other emerging markets,” said Brixiova.

Among South Africa’s credit strengths is the fact that its financial markets are well developed and among the strongest globally, not just among emerging markets. Further, South Africa has low foreign current debt, and the country is credible and transparent in terms of its macro-economic framework, she said.

Moody’s would stabilise the outlook of the sovereign provided that government implement policies and reforms that indicate the continued independence and strength of policy institutions, enhance medium-term growth and stabilise the government’s debt burden. SA must also decrease the value of guarantees to SOEs, explained Brixiova.

A ratings downgrade would take place if the strength and independence of institutions diminish, if the emerging policy framework becomes even less predictable or if it undermined economic or fiscal strength. And if liquidity pressures begin to re-emerge at SOEs, that would require  government intervention.

Brixiova explained the downgrade was introduced following the Cabinet reshuffle, as it coincided with different factors. Apart from being abrupt, its timing was questionable as fiscal consolidation was on track and a turnaround in growth had been expected.

Moody’s wanted to understand the timing and the abruptness of the move and what it would mean for policy direction and key credit indicators, said Brixiova.

The rating agency said the evidence of state capture coming to light impacts the assessment of institutions and secondly, business confidence which plummeted. Lower business confidence impacts investment, and ultimately economic growth which would pose a challenge to meet fiscal targets, she explained. 

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moody's  |  sa economy  |  junk status  |  debt  |  investment

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