SA Credit ratings note: MTBPS likely to precipitate downgrades

Executive Summary

  • In this short note, we provide a brief background of Moody’s and S&P’s credit rating of the sovereign, a breakdown of the methodology, recent developments and our expectations going forward.
  • We believe the fiscal slippage scenario presented in the 2017 MTBPS represents a material deviation from the previous policy of fiscal consolidation, and that this will likely be the primary reason for credit rating downgrades over the medium-term.
  • Both Moody’s and S&P will likely reduce their fiscal assessment scores, given a broad-based deterioration in the country’s fiscal metrics. This would therefore imply a category shift in their assessments of the country’s fiscal strength (or a lack thereof). A deterioration in the agencies’ economic assessments is also likely, which would imply a category shift in both Moody’s and S&P’s assessment of the macroeconomic risks built into their baseline forecasts.
  • We believe the above two changes would be the key reasons for a downgrade in the LC and FC credit ratings of both Moody’s and S&P.
  • Given the political turmoil currently being experienced, we could see the Institutional assessment changed to ‘weak’ from the current ‘neutral’. This would all but solidify a downgrade.
  • Other changes envisioned in the coming month: S&P could decide to eliminate the one-notch uplift it provides to the LC rating . This is because the fiscal assessment (we believe) is already more than 1-point weaker than the average of the other four assessments. To keep a one-notch uplift requires that the fiscal assessment alone is not more than one point weaker than the average of the other categories. This would imply a two-notch downgrade to the LC rating.
  • Fitch is expected to lower its outlook to ‘negative’ from stable currently. Fitch has expressed “shock” at the deviation of the MTBPS from the previous path of prudent fiscal consolidation.
  • Both lower potential growth and a deteriorating fiscal outlook remain credit-negatives in our view. This, combined with a structural reform deficit, would further reinforce the low growth expectation. The lack of private sector investment, a lack of capital mobility within SA, and limited political commitment to growth-enhancing structural reform implementation will probably keep SA on a low growth path, with all of the above a virtuous cycle or a feedback loop.
  • The current environment has proven that there is a lack of focus on growth-enhancing policy prioritisation, given the skew in focus to political developments. We are likely to see SA’s credit rating fall a notch over the coming month (Moody’s) to Ba1, with S&P falling to BB (both LC and FC). This would necessitate the removal of SA bonds from the Citi WGBI, and may result in outflows of between R80 to R120 billion.
By | 2017-10-27T13:55:02+00:00 October 27th, 2017|Markets and Research|0 Comments

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