New downgrade hurts SA

Ratings agency Moody’s changed the outlook on South Africa’s credit rating to negative from stable‚ the third adverse action concerning the country in less than two weeks.

However‚ it left the rating two notches above junk or sub-investment grade late on Tuesday‚ partly because of the reappointment of Finance Minister Pravin Gordhan.

Persistent low growth and a growing risk of spending targets being exceeded because of political pressure were the main reasons behind moving the outlook to negative‚ Moody’s said.

It kept the rating unchanged at Baa2 because of South Africa’s track record of “sound” macroeconomic policies.

The changing of the outlook to negative indicates that Moody’s could downgrade South Africa next year if the economy does not grow faster or if the state strays from fiscal prudence.

The only comfort is that even if it does downgrade‚ the rating would still be investment grade and in line with those of rivals Fitch Ratings and Standard & Poor’s. They rate South Africa just one level above junk status. Moody’s has always been the least pessimistic of the three‚ giving South Africa a higher rating even when the other two downgraded.

But even if a downgrade is not to junk status‚ it still raises the cost of borrowing‚ particularly for state-owned enterprises that have to borrow from global markets to finance multibillion-rand infrastructure projects. The fact that S&P and Moody’s now attach a negative outlook to their ratings while Fitch has a stable outlook puts pressure on Gordhan and the rest of the government to do more to boost growth.

The Treasury on Wednesday said Gordhan’s appointment would “ensure policy continuity”. It was addressing Moody’s concerns about the rising risk of fiscal slippage‚ it said.

“The minister has affirmed that government will stay the course of sound fiscal management and focus on fiscal consolidation and debt stabilisation in the medium term‚” it said.

“He assured that any extra expenditure would only be accommodated if extra revenue is raised and any revenue-raising opportunity would be carefully considered so as to ensure that it does not damage growth or affect the poor negatively.”

Last week’s firing of former finance minister Nhlanhla Nene and his replacement first by Desmond van Rooyen and then Gordhan prompted investor wariness‚ causing the rand to crash to new lows against all major currencies.

Peter Worthington of Barclays highlighted Moody’s citing of “political pressures” as a reason for its negative outlook‚ referring to the debacle around Nene’s axing.

“It is clear that a lot of hard-to-fix damage has been done to confidence levels‚” he said.

“Even without considering the cost of expensive new programmes such as nuclear power or national health insurance‚ political pressures were growing‚ calling into question the government’s continued ability to maintain spending restraint‚” Moody’s said.

The public sector wage hike above the 6% that was budgeted for was cited. Moody’s sees next year’s local elections as a source of “political pressure”. In addition to low growth due to structural reasons‚ Moody’s identified the effects of a weak rand on inflation and interest rates as risks to growth.

South Africa remained vulnerable to China’s slowdown‚ the commodities downturn and its delay in dealing with power constraints.

Any “further shocks” to growth and a lower commitment to fiscal discipline and debt stabilisation would trigger a downgrade‚ the agency said.