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Moody’s acts swiftly to put SA on downgrade review

The ratings agency says the abrupt change in leadership could have an immediate impact economic growth and public debt levels

03 April 2017 – 23:25 PM Hilary Joffe
Picture: REUTERS
Picture: REUTERS

Just hours after rating agency S&P Global downgraded SA’s foreign currency rating to junk status, rival Moody’s put SA on review for a downgrade in a move that suggests it will cut its rating sooner rather than later, possibly by more than one notch.

Moody’s rating on SA is two notches into the investment grade scale, so a one notch downgrade would still leave it investment grade, but some expect that it might opt for two notches when it publishes a scheduled statement on Friday this week.

Moody’s said its decision to put the rating on review was prompted by the abrupt change in leadership of key government insitutions, which raised questions about progress on essential reforms and about the effectiveness of SA’s policymaking institutions.

Given its potentially negative impact on fragile domestic and external investor confidence, the change in leadership could also have immediate implications for growth and public debt levels, Moody’s said.

The review will assess the likelihood of changes in key areas of financial and macro-economic policymaking as well as in strategic structural areas such as energy policy, Moody’s said.

Moody’s has been the most upbeat of the three major agencies, giving SA credit for the strength of its institutions and seeing last year’s local government elections and the increasing political contestation in SA as having the potential for more market-friendly changes in the medium term.

However, the agency said on Monday night that the timing and scope of the changes to the country’s government raised questions about the underlying strength of SA’s institutional framework, and its fragile economic and fiscal recovery.

Meanwhile, organized business has made a strong call for more accountable leadership that can create a more growth-friendly environment – and has highlighted the negative impact of the ratings downgrade, particularly for poor people.

Business Unity SA (Busa) on Monday night called for “accountable leadership and decisive action in the face of the S&P ratings downgrade”.

Busa CEO Tanya Cohen said the organisation would seek urgent meetings with officials in the tripartite alliance to map the way forward and re-set the economy on a positive trajectory. It has already initiated meetings with organised labour and civil society to seek this. “We have to urgently accelerate our efforts to create an environment conducive to stability and investment, and which will yield much needed growth and employment,” Cohen said.

Busa expressed concern that the political instability triggered by the extensive cabinet reshuffle was having a domino effect. “We are most concerned that it is the start of a negative spiral,” Cohen said. “With the cost of borrowing set to rise, and less capital being available as a result of the sovereign ratings downgrade by S&P, the country will find it increasingly difficult to service its debt and afford the necessary social development programmes and services,” she said.

Busa has encouraged all businesses to play an active role in holding government to account to build an environment conducive to growth and employment.

Business Leadership SA – which represents SA’s largest companies – said president Zuma was directly responsible for SA’s “catastrophic” rating downgrade by S&P and should be held to account. The cost of the downgrade to all South Africans, the poor in particular, would be felt in higher interest rates, higher inflation, higher food prices and lower economic growth which would reduce investment and employment, BLSA said.

The CEO Initiative, which had been working with government and labour over the past 16 months to try to stave off a downgrade, said SA’s growth outlook had been dealt a severe blow by the downgrade and all South Africans would be poorer.

The Initiative said the downgrade could have been avoided had the structural reforms necessary to underpin sustained and inclusive economic growth been implemented in the interests of all South Africans. The downgrade should serve as a call to implement structural and policy reforms, the CEOs said.