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There is no meaningful plan to avert more rating downgrades - economist

Jun 10 2017 14:30
Matthew le Cordeur

Cape Town – There will be no meaningful structural reforms or political resolutions to avert further downgrades, Nomura emerging market economist Peter Montalto said on Friday.

Moody’s on Friday downgraded the country’s long-term foreign and local currency debt ratings by one notch from Baa2 to Baa3, with a negative outlook, keeping it at investment grade.

On Friday, National Treasury warned that the negative outlook “indicates that the risk of further downgrades is still there”.

Montalto’s message comes as the African National Congress (ANC) has pledged to resolve policy uncertainty to reverse the rating downgrades.

“We are confident also that the outcomes of (the ANC’s policy conference) gatherings will result in an improved investment climate and should trigger a positive review in the coming months,” the ANC said in a statement on Saturday.

However, Montalto believes Moody’s will downgrade South Africa’s credit rating to junk status after Finance Minister Malusi Gigaba’s 2018 Budget speech.

FULL STATEMENT: Moody's downgrades SA

Moody’s said the key drivers for the downgrade were:

•    the weakening of South Africa's institutional framework;
•    reduced growth prospects reflecting policy uncertainty and slower progress with structural reforms; and
•    the continued erosion of fiscal strength due to rising public debt and contingent liabilities says its policy review will trigger ratings boost

“I see Moody's cutting to junk after next year's budget with further deterioration on all above factors by then,” Montalto said.

“They outline clearly that the next cut can come,” he said, pointing to the the negative outlook.

This was due to continued slow erosion of institutions, further weaker growth, less fiscal space and high contingent liabilities, he explained. “They see his scenario as of moderate probability given the political backdrop,” he said.

•    Moody’s has South Africa’s long-term foreign and local currency debt ratings one notch above junk status
•    S&P has South Africa’s long-term foreign ratings at junk status and local currency debt ratings one notch above junk status
•    Fitch has South Africa’s long-term foreign and local currency debt ratings at junk status

“Given I see S&P moving end year (to downgrade local currency debt to junk status), I think that Moody's next move is the key marginal one related to the World Government Bond Index.

“The negative outlook especially is important in keeping the index issue live as opposed to pushing it too far out into next year,” he said.

READ: CEOs warn against populist rhetoric as Moody’s downgrades SA

Montalto said the tone by Moody’s “is a little more bearish than expected”.

“They are downgrading on weaker institutional quality, fiscal weakening alongside rising contingent liabilities and weaker growth as well as softer reform prospects.

“This latter point whilst obvious is an important step for them who were more positive always before and shows some convergence in views of not levels to other agencies.”  

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moody's  |  anc  |  nomura  |  ratings downgrade
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