Good news from Moody’s

By Stanlib Chief Economist, Kevin Lings.

Global ratings agency Moody’s Investor Services, left South Africa’s international long-term credit rating unchanged at Baa3 on Friday night. Moody’s also changed the ratings outlook from negative to stable, ending the review for downgrade that started in November 2017.

This decision reflects Moody’s view that “the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework”. Moody’s argued that “the recovery of the country’s institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilisation of fiscal strength”. That is an impressive turnaround from the concerns expressed by Moody’s last year.

Moody’s highlighted three key areas of improvement that contributed to their decision:

1. Halting the deterioration in South Africa’s institutional framework

  • The recent change in political leadership appears to have halted the gradual erosion of the strength of South Africa’s institutions
  • A number of key institutions, including the Treasury, the South African Revenue Service (SARS) and key state-owned enterprises (SOEs) have started to recover some of their earlier strength
  • The technical strength and independence of South Africa’s media, civil society and institutions, including key ministries, the Reserve Bank and the judiciary, have been critical in sustaining the country’s credit profile over time
  • While it is still early days, the speed with which the President has moved to replace the leadership in key institutions, including the ministries of finance, mineral resources and public enterprises and SARS, illustrates the resolve to address problems and to set the state, society and the economy on a new and positive path
2. Improved growth performance and prospects
  • The change in political leadership comes in parallel with growing signs of cyclical, and perhaps structural, improvements in economic growth
  • The recovery in growth has been mirrored more recently by a sharp recovery in business and consumer confidence, illustrated in surveys and by other indicators such as the recent recovery in the value of the rand
  • While confidence can dissipate quickly, if sustained through further actions, it offers the prospect of rising levels of investment in South Africa’s economy and enhanced medium-term growth
  • The government recognises the need to support improving confidence with steady progress on structural reform, including in the areas of mining, energy and the SOE sector
3. Fiscal adjustment plans that should stabilise and eventually reduce the debt burden
  • The 2018 budget outlines a clear strategy for addressing rising fiscal pressures, with a front loaded, revenue-driven, fiscal adjustment, supported by material cuts in expenditures in this and subsequent years needed to finance, among others, rising expenditure on education
  • The recently announced one percentage point increase in VAT will broaden the fiscal policy response beyond the expenditure controls on which the government has increasingly relied in recent years. However, its significance goes beyond the moderate increase in revenues that the increase will allow. As the first increase in indirect taxes for over two decades, the change signals a marked, and credit positive, policy shift
  • Overall, Moody’s now expects the government’s debt burden to stabilise at around 55% of GDP over the 2018-2020 period
The decision to revise South Africa’s ratings outlook from negative to stable reflects a combination of factors. In essence Moody’s argues that a combination of growth, expenditure restraint and further improvements in the breadth of the revenue base and in collection capacity should, if pursued effectively, lead to the debt trajectory stabilising in the next two to three years and ultimately reversing.

Moody’s cautioned that the authority and capacity of the incoming administration is still to be fully tested. Also there is an acknowledgment that the divisions within the ANC, and more broadly within society, will present policymakers with diverse and sometimes conflicting political priorities which will create policy uncertainty. Two obvious examples of this are the still-to-be-agreed Mining Charter and the land expropriation without compensation initiative.

In terms of the land issue, Moody’s said it remains unclear how the new government will pursue its land transformation objectives, or what impact that will have on agricultural production and security. Importantly, Moody’s stressed that how the government acts on the land issue will provide important insights into the government plans to balance nearer-term economic objectives (to sustain confidence and promote investment) against longer-term social and economic objectives (to address unemployment, inequality and poverty).

Moody’s remains the only major credit rating agency to assign South Africa an investment grade rating for both its long-tern foreign debt and its long-term domestic debt.

Overall, the tone of Moody’s credit assessment of South Africa’s is very positive and certainly more positive than what most analysts would have anticipated. The rating agency tried its best to highlight as many positives as possible, and while they flagged some of the risks, these did not dominate any of the key discussion points.

Moody’s assessment brings into question the decision by S&P to downgrade South Africa on 24 November 2017, rather than wait to see how the impact of the ANC elective conference in December 2017. By changing South Africa’s ratings outlook to stable the risk of Moody’s downgrading the country has obviously receded. However, Moody’s did flag that if government is unsuccessful in delivering the planned structural reforms between now and the 2019 general election, the rating review could turn negative.

The rand strengthened in response to the good rating’s outcome, increasing the prospect of a cut in interest rates. Overall, this is a solid piece of good news for South Africa!

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