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SARB won’t move on rates as it awaits downgrade decision - analyst

Nov 23 2017 06:00
Lameez Omarjee

Johannesburg – A rate cut will be unlikely given the “significant event risk” of another credit rating downgrade by the end of this week, according an analyst.

News that inflation eased to 4.8% for October will not have much influence on the interest rate decision of the Reserve Bank's monetary policy committee on Thursday, explained FNB’s senior economic analyst Jason Muscat.

Inflation slowed from 5.1% reported in September, greater than market expectations. The rand subsequently strengthened as much as R13.87 to the greenback.

Besides Moody's and S&P's ratings reviews expected to be released on Friday, other risks to the currency include the elevated oil price, the ANC policy and elective conference and Eskom’s tariff application, said Muscat.

“Indeed, as things stand, it appears that the interest rate cut this year may have been a once off, rather than the beginning of a lowering cycle.”

FNB expects inflation to moderate to 4.7% in November.

Investec forecasts inflation at 5.3% for the year. This is expected to rise to 5.7% in 2018 and 5.8% in 2019. Economist Kamilla Kaplan said this will be driven by a strengthening global cycle, a further lift in commodity prices and higher local administered tariffs. 

Johann Els, head of economic research at Old Mutual Investment Group, also expects the South African Reserve Bank (SARB) to keep rates unchanged. “The rate cut in July was fully justified given sharply lower inflation, weak growth, improving current account dynamics and a fairly stable currency,” he said.

“We expect rates in South Africa to be on hold until at least after the February budget.  The SARB would need to gauge the outcome and impact of the ratings decision, the ANC’s elective conference and the February budget before they can reassess the rates stance,” he added. 

“We expect a Moody’s downgrade to Ba1 on the foreign [and local] currency front on November 24," Investec chief economist Annabel Bishop said in a report. A credit downgrade would result in some rand weakness, higher bond yields, and weaker GDP growth, she said.

“If SA does not see S&P and/or Moody’s lower the remaining investment grade credit ratings to sub-investment grade in November 2017, it could occur by the end of the first half of next year should the ANC elective conference outcome be negatively perceived by the markets,” added Bishop.

Avoiding further credit downgrades requires government debt levels to be “reined in”, a rise in economic growth and improved governance at state-owned enterprises, said Bishop.

“SA’s recent credit rating downgrades have occurred, amongst other factors, on the escalation in government debt to GDP since 2009 in a declining growth environment,” Bishop explained. Substantial contingent liabilities for SOEs have also been a relevant factor.

Els expects a downgrade by both Moody’s and S&P on Friday. “Moody’s will likely downgrade both the local and foreign currency ratings from one notch into investment grade to sub-investment grade.

“S&P’s foreign currency credit rating for SA is already sub-investment grade. We expect them to downgrade the local currency rating to sub-investment grade as well.”  

Borrowed time

Dr Martyn Davies, managing director of emerging markets and Africa at Deloitte Africa, believes that structural change needs to be introduced. This involves privatisation to cut the costs to the state. Further steps should be taken to cut leakage, or wasteful expenditure, as well as corruption, he told Fin24.

“We are living on borrowed time with ratings agencies. And I think they have been quite generous, up until this stage,” said Davies.

“I am hoping that generosity and Christmas spirit continues especially at this time of the year, but the world does not work that way, and it does not work on hollow rhetoric either.”

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sarb  |  inflation  |  sa economy  |  rates  |  credit downgrade
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