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Snap survey: Economists expect Moody's to downgrade SA

Jun 09 2017 15:54
Lameez Omarjee

David Aldrich, associate managing director of emerging markets, Kristin Lindow, senior vice president and Zuzana Brixiova, vice president and senior analyst during a question and answer session at Moody's 11th Annual South African Credit Risk Conference. (Lameez Omarjee)

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Johannesburg – Five economists, part of a snap survey conducted by Fin24, agree that rating agency Moody’s will downgrade the country’s credit rating by one notch, keeping it at investment grade.

The rating agency has the country’s long-term foreign currency and local currency debt rating two notches above junk status at Baa2. Following the Cabinet reshuffle in March, where President Jacob Zuma replaced former finance minister Pravin Gordhan with former home affairs minister Malusi Gigaba, Moody’s placed the country on review for a downgrade.

At the time both Fitch and Standard and Poor’s (S&P) downgraded the foreign currency rating to junk status.

READ: Moody's places SA on downgrade review as S&P takes action

Last week both Fitch and S&P affirmed their decisions to keep the rating at BB+. Fitch however changed its outlook to stable, and S&P affirmed the negative outlook.

Fitch raised concerns over low economic growth, which poses a risk for fiscal consolidation and rising contingent liabilities. S&P listed policy continuity and the ability of the country to reduce economic inequalities in the medium term, among other reasons for its decision.

S&P pointed out that the flexibility of the monetary policy is a strength.

Moody’s is expected to announce a decision shortly. Previously, Moody’s expressed the view that the Cabinet reshuffle could impact progress on economic growth reforms. Gigaba had met with both S&P and Moody’s in May in an effort to avoid another downgrade, Bloomberg previously reported.

Ahead of the announcement, Fin24 spoke to seven economists who shared their views.

Kevin Lings, chief economist at Stanlib, said Moody's would downgrade the rating to one notch above junk status and keep the negative outlook.  

“They will keep us on a negative outlook, that is quite important because it suggests that they are still very concerned about the broader political economic environment,” he said. If conditions do not improve in the next six months, the rating agency could downgrade the country to junk.

Lings said that the recession could be listed among the concerns. The economy contracted 0.7% in the first quarter of 2017, following a contraction of 0.3% of 2016.

READ: SA enters recession as GDP contracts for a consecutive quarter

He added that the fiscal slippage such as rising debt levels and the risk that government will not stick to the parameters of its budget will probably be flagged by Moody’s. Further, the state of finances at state-owned enterprises (SOEs) may demand more support from government, causing debt guarantees to increase.

Dr Azar Jammine, chief economist at Econometrix, said that reports of the recession would have merely reinforced Moody’s decision to downgrade the credit rating. To improve the credit rating and eventually be upgraded would require a new president, said Jammine. Furthermore, South Africa should take fundamental steps to improve growth, he said.

Annabel Bishop, chief economist at Investec, shared the view that South Africa needs faster economic growth, reform in SOEs and reduced borrowing as steps to be taken to upgrade the rating.

Thabi Leoka, economic strategist at Argon Asset Management, explained that if the economy does not recover from the recession and if there is no stronger growth in the coming quarters, it would raise the risk of another downgrade.

READ: Further downgrades expected – economists

Rian le Roux, chief economist at Old Mutual Investment Group, said that the weak economy, the risk to tax revenues and the budget deficit may be factors in contributing to the negative outlook. Le Roux previously said that the decision by Moody’s may provide a reprieve, but this will be short-lived as S&P and Moody’s will be visiting the country again in less than six months.

Junk status looming

Geoff Blount, managing director at BayHill Capital, is of the view that the downgrade will be by two notches, to sub-investment grade. Blount explained that the recession will add to the risk Moody’s will attach to South Africa’s debt. “The recession means less tax revenue and widening budget deficits,” he said.

Maarten Ackerman, advisory partner and chief economist at Citadel, is also of the view that Moody’s will follow S&P and Fitch’s decision to downgrade the rating, both local and foreign currency, to junk.

Read Fin24's top stories trending on Twitter:

fitch  |  moody's  |  s&p  |  junk status  |  credit downgrade  |  sa economy  |  investment
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