Moody’s decision not to junk SA’s credit ratings was widely expected and priced in. What was not anticipated was the validation it gave to President Cyril Ramaphosa’s reform efforts by changing SA’s credit outlook from negative to stable.
The rand strengthened by 7c over the weekend to R11.67/$ as the market and investors welcomed the news.
After 1994, Moody’s led the other main rating agencies on the way up. Now, having acknowledged that "SA’s economy has significant growth potential", it looks set to do so again.
Fitch and S&P Global Ratings currently rank SA subinvestment grade, but Moody’s has confirmed SA’s ratings on Baa3, the last rung of the investment-grade ladder.
In recent years, as the other main ratings agencies took the lead in downgrading SA, Moody’s was inclined to give the country the benefit of the doubt. It did so again in November, when S&P slashed SA’s ratings deeper into junk territory after the disastrous medium-term budget.
Moody’s instead put SA on a 90-day review to first assess the outcome of the ANC’s December presidential election. How it has been vindicated.
The first reason Moody’s has not downgraded SA is that Ramaphosa’s administration has, over the past three months, managed to halt the deterioration in SA’s institutional framework.
The speed with which Ramaphosa has moved to replace the leadership of the ministries of finance, mineral resources and public enterprises as well as the SA Revenue Service illustrates "resolve" to address past problems and "to set the state, society and the economy on a new and positive path", says Moody’s lead sovereign analyst for SA, Zuzana Brixiova.
The second major driver of Moody’s decision to confirm SA’s ratings is that the political revival is being mirrored by a sharp rise in confidence. This raises the prospect of rising levels of investment and enhanced medium-term growth, Brixiova says.
Though it’s clear that sustaining the growth recovery will require further reform, especially in mining, energy and the state-owned enterprise sector, Moody’s feels that the enhanced political and policy certainty will sustain confidence, at least for now.
The third driver of Moody’s ratings action is that SA now has a credible fiscal plan.
It’s particularly supportive of the decision to raise the Vat rate, and not just because of the expected R22bn it will yield. As the first increase in indirect taxes in two decades, Moody’s considers the Vat hike to signal "a marked, and credit-positive, policy shift".
It now expects government debt to stabilise at 55% of GDP by 2020, ahead of national treasury’s forecast that it will stabilise at 56.2% in 2021/2022.
In short, Moody’s thinks the erosion of SA’s institutions will gradually be reversed under a more transparent and predictable policy framework. If sustained, this will in turn support a gradual economic recovery and the stabilisation of SA’s fiscal position.
However, Moody’s warns that the challenges of meeting diverse economic, social and fiscal objectives cannot be underestimated.
It says there are two possible routes SA could now take: a positive one in which "a virtuous cycle emerges of economic growth, fiscal prudence and mounting social cohesion", or a more negative one in which policy ineffectiveness continues to undermine confidence, growth and social cohesion, hurting the fiscus.
How government resolves the issues surrounding the mining charter and land expropriation without compensation will be important in signalling which route SA is likely to take.
Satisfactory progress on the mining charter would be an important test of the ANC’s ability to reach the compromises needed to push through a broader reform agenda, says Brixiova.
How government pursues its land reform objectives will also provide important insights into how it 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 next ratings review of the country will be on October 12. The outcome will hinge on how effective government is at repairing state institutions, raising the growth rate and setting the country on a fiscally sustainable path.
"There is still a non-negligible risk of a change in Moody’s outlook from stable back to negative," warns Momentum Investments economist Sanisha Packirisamy.
"Investors will be seeking clarity on the adoption of land reform without expropriation ... and will remain vigilant of signs that the rule of law has been reinstated in the country through the conviction of a number of individuals involved in high-profile corruption cases."
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