Government responds to S&P junk rating
South Africa’s government has responded to the rating decisions of S&P and Moody’s on Friday, 24 November 2017, in which S&P lowered the country’s long term foreign and local currency debt ratings by one notch each to ‘BB’ and ‘BB+’, respectively.
The ratings agency cited weak real nominal GDP growth that has led to further deterioration of South Africa’s public finances beyond the rating agency’s previous expectations.
Nonetheless, S&P changed the outlook to stable from negative citing: that the stable outlook reflects their view that South Africa’s credit metrics will remain broadly unchanged next year.
It said that political distraction could abate following the party congress of the governing African National Congress (ANC) in December 2017, helping the government to focus on designing and implementing measures to improve economic growth and stabilize public finances.
Moody’s meanwhile, placed South Africa’s long-term foreign and local currency debt ratings of ‘Baa3’ on a 90-day review for a downgrade.
The ratings carry a negative outlook.
According to Moody’s, the decision to place South Africa’s rating on review for a downgrade was prompted by a series of recent developments which suggest that South Africa’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.
According to the rating agency, growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures.
Moody’s further indicated that the review will allow it to assess the South African authorities’ willingness and ability to respond to the above rising pressures through: growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance in light of government exposures to contingent liabilities.
In response, the government said that extensive engagements were held between all the rating agencies and government, both prior to and following the 2017 Medium Term Budget Policy Statement (MTBPS).
“There can therefore be no doubt of government’s strong commitment to addressing the structural constraints to growing the economy and improving public
finances.”
It said in a statement that speculative grade ratings have negative implications for economic growth, borrowing costs for the economy as a whole, state owned companies’ ability to borrow and the ordinary person on the street.
“Decisive actions in managing government expenditure and closing the revenue gap are critical for achieving sound public finances,” the government said.
“In the MTBPS chapter on Fiscal Policy, we indicated that additional spending cuts or tax increases of R40 billion (0.8% of GDP), would be required from 2018/19, in order to stabilise public debt below 60 per cent of GDP over the next decade.
“Over the next two weeks, the PFC and Cabinet will consider a package of measures to be implemented from 2018,” it said, adding that specific details on these measures will be announced in the 2018 Budget.
Government said it will address the root causes of the revenue gap of R50 billion arising from the underperforming economy and a possible erosion of revenue collection capability. “In this regard, a judicial commission of enquiry is being undertaken,” it said.
Absa Investment Management, meanwhile, said that the credit action will result in increased volatility going forward as certain global passive investors need to re-balance their exposure to the sovereign credit.
“This move will affect the Barclays Global Aggregate Index but not the larger World Government Bond Index(WGBI). Since it is likely to be the pre-cursor to exclusion from the WGBI, investor positioning could pre-hedge by selling SA bonds and offset any positive market reaction.”
Absa said that while ultimately this is better than the worst case scenario (where both agencies cut ratings), “we believe there is limited scope for appreciation for bonds and currency as we are less than a month from the ANC elective conference in December.
“Tactically we expect a shallow recovery in the bond and currency markets and relatively flat performance from equity markets followed by a return to the levels of volatility experienced since the Mid Term Budget Policy Statement.”
It said that focus will now be on the ability of the elective conference outcome and next year’s budget to keep the surviving investment grade rating intact.
“We expect that markets will open weaker initially followed by a shallow recovery as the news was broadly expected,” Absa Investment Management said.
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