South Africa on tenterhooks as it awaits Moody’s verdict

The rand tumbled 1.2 percent after Finance Minister Tito Mboweni questioned whether the MTBPS would stay Moody’s hand. Photo: Phando Jikelo/African News Agency (ANA)

JOHANNESBURG – The rand tumbled 1.2 percent yesterday after Finance Minister Tito Mboweni questioned whether the Medium-Term Budget Policy Statement (MTBPS) would stay Moody’s hand in cutting South Africa’s investment-grade rating after a negative critique by ratings agency Fitch.

Speaking to Members of Parliament in Cape Town yesterday, Mboweni said he really hoped that Moody’s would keep the rating the same. “But it is not looking good. Fitch is really not impressed with us, and said: ‘You guys didn’t go far enough,’ ” Mboweni said.

By 2.42pm yesterday, the rand had fallen to a low of R15.1878 to the dollar. By 5pm it was bid at R15.1139. 

This comes after after the markets scoffed off South Africa’s three-year budget tabled by Mboweni in his MTBPS on Wednesday.

Fitch Ratings said yesterday that the MTBPS had failed to stabilise the economy due to contingent liability, mainly posed by Eskom’s R450 billion debt. “A clear path toward debt stabilisation is still missing,” Fitch said. “Failure to stabilise the debt-to-GDP (gross domestic product) ratio over the medium term is a negative rating sensitivity.”

In July Fitch reduced its outlook on South Africa’s BB+ rating to negative.

The ratings review by Moody’s, to be released today, is crucial, because a sub-investment-grade rating would lead to an expulsion of South Africa from the Citi World Government Bond Index and a forced selling of domestic bonds, weighing on the rand.

Even the Special Paper on Eskom presented by Minister of Public Enterprises Pravin Gordhan on Tuesday did not help to halt the risk-off mood by investors.

Senior dealer at TreasuryOne, Andre Botha, said the rand had taken a serious knock this week, due to domestic and global factors.

“Two of this week’s main risk factors are out of the way after yesterday’s Fed meeting and MTBSP. The rand, along with other emerging markets, traded on the back foot directly after the announcement, with price action showing that the local currency tested above R15.10 (to the dollar),” Botha said.

“Since then, we have seen a slightly softer dollar, with both the pound and euro trading in the upper ends of their respective ranges and EMs (emerging markets) rebounding. The rand will likely continue to suffer from its hangover after the MTBSP and stay on the ropes, as we await today’s credit rating review by Moody’s.”

However, economists still believe the ratings axe won’t fall when the ratings agency reviews the country today, but the outlook will change.

Peter Attard Montalto, the head of capital markets research at Intellidex, said they believed Moody’s would look to hold off any move till after the Budget in February, “stating they are waiting to see more measures offered then (plus progress on implementation of the Eskom paper)”.

He said: “The scorecard we think is irrelevant here, and indeed Moody’s has been at pains to reinforce this with the market in recent months. There was going to be an expected deterioration in the fiscal strength metrics anyway this time around and Moody’s has already done its desktop review in September. Hence… we think Moody’s will construct its own framework to remain pat.”

Stanlib’s chief economist, Kevin Lings, and head of fixed income, Victor Mphaphuli, said yesterday: “However, with the most recent decline in government finances being so significant, it is expected that Moody’s will revise South Africa’s credit rating outlook from stable to negative, keeping the country on investment grade. But if government finances do not improve significantly within the next 12 months, the ratings agency is likely to downgrade South Africa to below investment grade.”