JOHANNESBURG – D-day is fast approaching for South Africa, with the medium-term budget policy statement (MTBPS) on October 29 and a decision by Moody’s on the country’s ratings shortly thereafter.
The country’s precarious economic position was again highlighted this week with Eskom power cuts, while SA Reserve Bank (Sarb) governor Lesetja Kganyago discussed the country’s ratings dilemma.
Absa’s Fourth Quarter 2019 Quarterly Perspectives report last week said that the biggest risk for the balance of payments was a possible wave of portfolio disinvestment if Moody’s downgraded South Africa.
“However, we believe the risk of a near-term downgrade is small, although with South Africa’s fiscal imbalances and weak growth, we believe Moody’s is more likely than not to assign a negative outlook on its Baa3 rating on November 1,” Absa said.
Absa said the MTBPS represented a huge crossroad for fiscal policy against a backdrop of weak growth, disappointing revenue collections and massive bailouts for Eskom.
“The government rightly believes that South Africa has no more room to hike taxes. We forecast a main budget deficit of 6.5percent of GDP (gross domestic product) this year and 5.9percent of GDP in 1920/21, assuming R45billion in spending cuts and R5bn tax hikes next year. We believe there is a risk that spending cuts next year could be bigger, but also that growth could disappoint, creating downside risks for revenues.”
Absa’s economic research team also said the outlook for economic growth beyond the third quarter remained subdued, in part because of ongoing weakness of private sector business confidence.
Kyangago, speaking at the annual meetings of the International Monetary Fund (IMF) and World Bank in Washington last week, said that if Moody’s downgraded the country’s credit rating, South Africa would fall out of the investment-grade indices, and that could mean that investors will have to sell South African bonds.
“The effect of that depends on whether the market has already discounted a possible Moody’s downgrade.
"If the Moody’s downgrade is within the existing financial market prices, then the downgrade will not affect the bond yield,” Kganyago said.
“However, if it is not within existing prices and you have got accelerated sell-offs, not only would you have capital outflows, you will have a depreciation of the exchange rate, and if it is sustained, it feeds through to inflation, the central bank will be left with no choice but to respond to rising inflation.”
He said government-bond yields could drop and South Africa could maintain its investment-grade credit rating if policy makers implemented the necessary reforms.
“South Africa’s credit rating is in the hands of South African policymakers. South African policymakers know exactly what must be implemented so that Moody’s will not even venture into a downgrade,” he said.
“We must go and implement those issues while at the same time leveraging on our credit strengths.”
The IMF has downgraded South Africa’s growth forecast this year to a paltry 0.7percent, down from 1.2percent forecast in April.
The Sarb has also lowered its growth forecast and expects it to be weak at 0.6percent this year.
FNB’s economic research team said Eskom’s announcement of a new round of rolling blackouts had soured the mood, casting an even longer shadow over an already poor growth prospects for the year.
On Wednesday, the struggling power utility started implementing stage two load shedding, which involved removing 2000 megawatts from the grid each day in order to avoid a total collapse of the grid.
As Statistics SA will release the September print for the Consumer Price Index this week, FNB said it expected both headline inflation and core inflation to moderate slightly to 4.2percent year-on-year in September, from 4.3percent in August.