<strong>By: STANLIB</strong>

<h2><strong>Moody’s revises SA’s credit rating outlook with harsh credit assessment of SA after shock deterioration in fiscal metrics</strong></h2>

The shock deterioration in SA’s fiscal parameters presented by the Minister of Finance in the Medium-Term Budget Policy Statement, together with the lack of detail on how government intends to remedy the fiscal deterioration, clearly forced Moody’s to change its outlook for SA’s credit rating to “negative” from “stable”, says STANLIB Chief Economist, Kevin Lings.

The weak economic environment, a further revenue shortfall and additional funding requirements by SOEs meant National Treasury was always going to have to report further fiscal slippage. However, the extent of deterioration announced by Minister Mboweni on 30 October exceeded all expectations.

In the two days following the MTBPS the rand/dollar exchange rate has declined by just over 3% and the 10-year government bond yield has weakened by 50 basis points. The negative rating outlook will, unfortunately, increase market uncertainty, suggesting that periods of strength in the rand and bond markets will be difficult to sustain until the rating position from Moody’s is resolved.

As far as Moody’s is concerned, the current Baa3 credit rating rests on the “government's ability to quickly develop a credible strategy to halt and ultimately reverse the rise in debt”. In that regard the 2020 budget will provide a key indication of whether or not the government is committed to the fiscal consolidation recommended by the MTBPS. Achieving this in the current time-frame appears highly unlikely.

Overall, the tone of Moody’s credit assessment of South Africa’s is extremely harsh (for good reason) and significantly different from recent reviews. Risks that Moody’s defended just a few months ago have now become points of significant criticism, given the sharp deterioration in the MTBPS. It also appears that Moody’s is placing a lot of emphasis on the National Budget in February 2020 to see if government is able to articulate a much clearer fiscal strategy that can be implemented.

At this stage we would conclude that the chances of Moody’s downgrading South Africa’s credit rating to below investment grade in the first half of 2020 are well above 50%, and such a move would indicate that Moody’s sees SA as a greater financial risk than it did in 1994 when giving our first Baa3 rating, Lings says.

Victor Mphaphuli, STANLIB’s Head of Fixed Income, says after the MTBPS, bond markets and the rand reacted sharply because it was evident that SA ran the risk of a full downgrade from Moody’s. Over the next few months, unless government either implements growth-orientated policies or takes hard decisions to bring down the debt to GDP ratio, it is likely that there will be a full downgrade.

However, the bond and currency markets have largely priced in this risk already. They are trading as if SA were a fully-downgraded country. “Over the next few months, unless National Budget statement in February 2020 shows a marked improvement, the market will continue to price in a premium.  This calls for caution in managing fixed income portfolios.,” Mphaphuli says.

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