Finance minister Tito Mboweni’s budget likely did enough to prevent Moody’s from shifting the country’s rating in March 2020, says Nedbank economist Walter de Wet.
In a research note, the economist predicted that the ratings agency is likely to maintain a Baa3 (Negative) rating on the country for now.
“That said, there remains a one-in-three chance of a downgrade on South Africa in the future (possibly in November) and as such, the budget likely only managed to buy time should there be no progress on cutting the government’s wage bill,” Nedbank said.
“If we are wrong and Moody’s does indeed downgrade South Africa next month, our analysis suggests one should look for rand weakness of up to R2 against the USD from a starting point of around R14.50.
“As a result, we would target at least R16.50 before we look for any recovery.”
At the same time, Nedbank said it expects bond yields to spike by 50-100bps, before a recovery happens. The resulting rand weakness will most likely postpone a rate cut by the SARB towards 4Q 2020 – as opposed to a potential cut as soon as 2Q 2020, it said.
Risk of execution
Key to the risk of a Moody’s downgrade is how well the government will execute its plans to cut down on the wage bill.
“We are cognisant of the fact that the 2020 Budget is not the first budget to pencil in cuts to the wage bill,” Nedbank said.
“Previous budgets have attempted this and failed. As such, there is substantial execution risk to the Budget, in our view, which would leave the currency in general on the back foot until the political will to push through fiscal discipline exists.”
These concerns have been echoed by Moody’s which has indicated that it is not particularly impressed by the government’s commitment to cut public spending.
“The authorities have yet to negotiate any moderation in wages with the country’s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations,” it said in a post-budget statement.
Bloomberg notes that financial markets have been pricing in a downgrade for months, and the other two major rating companies (S&P and Fitch) have had South Africa at junk status for two years. Should Moody’s follow suit, the nation would suffer enormous financial consequences.