Ratings agency Moody’s is in South Africa this week trying to understand the economic state of a country it put up for review for a possible downgrade two weeks ago.
Economist at Bruggemans & Associates, Cees Bruggemans has outlined a few questions Moody’s seeks answers to as it identifies two sets of drivers shaping its review.
The first driver
According to Bruggemans, the first driver concerns the likelihood that the decline in South Africa’s economic strength will be reversed in the medium term.
The ratings firm will likely focus on three dimensions: economy vulnerability, planning effectiveness, and recent reform success.
“Moody’s likes to know the extent that the economy is vulnerable to further adverse global, regional, domestic and financial market dynamics – its impact on government revenues, fiscal balance, debt.
“It notes our growth is under threat from drought, low commodity prices and volatility in global financial markets,” the economist said.
Bruggemans said that on balance, “our economic vulnerability has been fully hit. More global hits are always possible but more as tail risks”.
The economist said that South Africa’s growth story is not only about infrastructure development and the labour market. It concerns education, intrusive regulations, property rights, prescriptions regarding ownership, labour and supplier compositions, foreign and ideological preoccupations, and public sector inefficiencies.
These concerns are yet to be addressed to any extent, stated Bruggemans, noting that the country’s growth prospect is yet to make a decisive turn for the better.
The second driver
The second driver, he said, concerns the likelihood of stabilisation and restoration of fiscal strength. Moody’s interrogates government policy impact on its balance sheet, the debt ratio, whether budget promises made will be kept, implications of great public ambitions, and prolonged low growth, spending pressures, and politics.
“External and internal shocks – lower than forecast growth, and large public wage bill hikes – have weakened the government balance sheet, further worsened by SOE (parastatal) encroachment, causing the debt ratio to further weaken,” Bruggemans said.
And while the wage bill will be arrested, lower growth prospects have not been decisively addressed.
What could happen:
According to Bruggemans, a ratings downgrade could follow if:
- The government policy and strategy is unlikely to lead to reversal in debt trajectory;
- There is further shock or lower confidence in government commitment to fiscal restraint;
- There is further deterioration in investment climate if it undermines medium-term growth prospects and availability of external finance;
- There are indications that growth slowdown will be even deeper and/or more protracted than currently expected.
He said Moody’s may reaffirm its rating if it concludes that SA policymakers:
- Will maintain spending restraint;
- Deliver on planned structural reforms;
- Ensure fiscal consolidation per budget (deficit);
- Reverse deterioration in key credit metrics.
Bruggemans said that Moody’s may vote in favour of delay, at least to December, but added that rating agencies ‘are hard nosed’, with their reputations also on the line, and another 50 countries also begging for leniency.
The economist said that another downgrade would send a serious message that not enough progress is being made in the country.