How much is riding on this week’s Moody’s decision

Moody’s Investors Service is scheduled to publish its rating decision on South Africa’s debt this week (23 March) after cutting the country’s debt one level in June last year.

The ratings firm currently has South Africa one notch above junk status, though the rating is on review for downgrade.

For a government, losing ‘investment grade’ status is a headache as certain types of investors — usually big pension funds or Exchange Traded Funds — are mandated to only buy high-grade debt, which means they are forced to sell any bonds which are downgraded to junk.

As a result, a downgrade would kick South Africa out of the Citi World Government Bond Index and the Bloomberg Barclays Global Aggregate Index, which could in turn trigger outflows of as much as $6 billion (R72 billion), according to RMB Morgan Stanley estimates.

According to Reuters, Moody’s rarely spares those it puts on a downgrade warning.

“Only seven of the dozens of countries it has had on review over the last two years have been reprieved,” Reuters reported on Friday. “South Africa was one of those. None have been saved twice.”

It added that a cut to junk could trigger up to R100 billion ($8.5 billion) in selling by foreign investors.

In morning trade on Monday (19 March), the rand reflected some jitters in the market ahead of Moody’s announcement, with the local unit moving back up above R12.00 against the dollar.

• Dollar/Rand: R12.04  (-0.62%)
• Pound/Rand: R16.75  (-0.57%)
• Euro/Rand: R14.77  (-0.39%)

Positivity

However, there has been a noticeable change in sentiment surrounding the country since the initial cuts in June, with the election of Cyril Ramaphosa as president, and the announcement of a more austere budget at the end of February.

In a note published directly after the budget on 21 February, Absa said that this culmination of factors would likely be enough to avoid a junk status credit downgrade.

“While the possibility of a credit ratings downgrade still exists – since the Mid Term Budget Speech in October 2017 – it appears as if the projected fiscal position has improved. For instance, the projected debt to GDP is an improvement on the projections made in the Mid Term Budget Speech,” said Kwaku Koranteng, acting head of Absa Asset Consulting.

“In addition to that, given recent political developments in the country, as well as the attempts to improve and stabilize the State Owned Enterprises, the direction of the events of the last 3 months, including today’s budget speech, will help in avoiding another downgrade,” he said.

Land expropriation

Despite being on a clear upwards trajectory, international perceptions of South Africa were once again dealt a blow with the announcement that it would be pursuing ‘land expropriation without compensation’.

A parliamentary committee is currently looking at amending the constitution to allow land seizures without compensation, a change the main opposition Democratic Alliance says will deter investment and curb agricultural production.

However, finance minister Nhlanhla Nene has moved quickly to allay fears, stating that land expropriation without compensation would be dealt with in a “responsible manner” that addresses social challenges without affecting the economy negatively, reports Bloomberg.

The minister and Treasury officials met with Fitch Ratings and Moody’s Investors Service on Monday (12 March).

“South Africa is committed to fiscal consolidation, both on the revenue and expenditure side, and would look to increase capacity at the South African Revenue Service to improve tax collection,” Nene said.

Read: Ramaphosa’s presidential salary vs other world leaders