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South Africans will know by midnight on Friday night whether the country has entered the downward spiral of an across-the-board junk rating of government debt, or won another reprieve.
If Moody’s joins Fitch and S&P Global Ratings in downgrading SA’s rand-denominated government bonds as junk, one outcome will be SA’s removal from the Citi world government bond index — leading to a heavy outflow from the bond market as many fund managers will be obliged to put their money elsewhere.
That outflow could amount to as much as R100bn.
Moody’s put SA on review in November.
In SA’s favour is a positive reception of February’s budget, by all three of the main rating agencies — something recently reappointed Finance Minister Nhlanhla Nene highlighted during a recent roadshow to convince international investors of the government’s plans to get SA back on track.
Also in the plus column is a surprisingly strong set of economic growth data for the fourth quarter of 2017 — with growth for the year coming in at 1.3% against the Treasury’s forecast 1%.
Moves under President Cyril Ramaphosa to rein in corruption and state capture — including the suspension of Tom Moyane as commissioner of the South African Revenue Service (SARS) and the National Prosecuting Authority’s (NPA’s) decision to reinstate corruption charges against Jacob Zuma that date back to before he became president — are also signs that things are moving in a positive direction.
However, there is nervousness over the government’s commitment to expropriate land without compensation to speed up the glacial pace of land reform.
BMI Research, a unit of Fitch, has also expressed reservations about how divisions within the ANC will affect Ramaphosa’s ability to effect policy change.
And the current account deficit, which is also watched closely by rating agencies, widened more than expected in the fourth quarter of 2017 — to 2.9% of gross domestic product (GDP) from 2.1% the previous quarter, despite the pickup in growth.
Reuters noted in a recent analysis that Moody’s hardly ever spares a country on review twice — and SA was given a reprieve in December.
But it also pointed out that SA would still belong to the GBI-EM index, which could help counteract some of the forced selling by trackers of the Citi fund.
Analysts have mostly been optimistic, in the run-up to the decision, that SA has done enough to stave off a downgrade.
FNB chief economist Mamello Matikinca said if Moody’s had not downgraded in December, after October’s medium-term budget policy statement and before the ANC elective conference, “what justification would they have now given how much the political environment and confidence levels have improved?”
Wichard Cilliers, head of dealing and a director at TreasuryOne, said: “For now we are of the opinion that SA has done enough not to be downgraded and bought itself a little extra time.
“We do think that Moody’s will emphasise the need to keep spending under control and also for better management at SOEs [state-owned enterprises]. We also feel that the market has priced most of this in at the moment, but we can see the rand test better levels on the back of this.”
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