<strong>By: Sanisha Packirisamy, Chief Economist at Momentum Investment</strong>

Speaking on the upcoming Moody's ratings review of South Africa, Chief Economist at Momentum Investments, Sanisha Packirisamy We are expecting a downgrade in the outlook from stable to negative, but the rating, in our view, is likely to remain unchanged. Moody’s noted that the breach in the expenditure ceiling was viewed as a once-off and acknowledged that outside of the additional allocation to Eskom, expenditure (including projections for the wage bill in the next three years) had in fact been pared back. We expect Moody’s to take a wait-and-see approach to Eskom to review its turnaround strategy and the proposed unbundling model, once more information comes to light.

The financial and operational risks facing SA’s ailing parastatals still remain the biggest threat to ratings, in our view, given the risk they pose to government’s balance sheet. In terms of growth, Moody’s takes a longer term view and in that respect, trend growth will have a bigger impact on the rating relative to growth in the first half of 2019. If the load shedding escalates or extends for a longer-than-expected period, this may damage prospects for trend growth and that could have a negative effect on the rating.

Should conditions deteriorate (i.e. extended load shedding, little progress on Eskom’s turnaround strategy, a deeper and more extended dip in growth or a worsening fiscal and debt trajectory) a ratings downgrade to junk status further down the line could still result in money flowing out of SA’s bonds and equities, which could have a negative impact on the currency. There could however be some offset provided if SA is included in higher-yielding indices - in which case SA could look attractive from a lower-graded composite of countries.

There is also a possibility Moody’s may elect to postpone Friday’s review should it need further information to make a more informed ratings decision. In that case, we view it likely that it would take place later this year after the elections and once it has more information on updated fiscal dynamics, Eskom’s turnaround plan and progress on SA’s structural reform agenda.