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Is SA in for a Moody’s downgrade?

The ratings agency has obviously seen things that are cause for concern – Charl Kocks, CEO – Ratings Africa.

SIKI MGABADELI: Moody’s investor service has placed the Baa2 bond and issuer ratings of the government of South Africa on review for downgrade. The ratings agency says the decision was prompted by the continuing rise in risks to the country’s medium-term economic prospects and to its fiscal strength, notwithstanding the tighter fiscal stance undertaken in the 2016/17 budget.

And Moody’s cited South Africa’s weak economic performance as a risk factor when assigning a negative outlook to the rating in December 2015. That was their reasoning for that negative outlook in December 2015. So are we in for a downgrade? Are they going to go down to the level where Fitch and S&P are?

Let’s chat to Charl Kocks, who is CEO at Ratings Africa. Charl, thanks for your time this evening. What do you make of Moody’s decision?

CHARL KOCKS: I think it makes sense in the sense of the flags that they’ve raised in the past and, as you mentioned, in December 2015, where effectively we received a negative outlook. Now, the changes that credit ratings agencies make are signaled to the market to the extent that they possibly can. And, by giving that indication there, Moody’s obviously were seeing some things that concerned them. They are now coming today to say that the review is starting. What I find somewhat unfortunate is that they stated it to be a review for downgrade. It seems to indicate that it might not be meant that way. They are going to look for reasons not to do so.

When you look at the rest of the document, though, they do say that the rating could remain stable if [the survey] gives some specific reason. So we might be misunderstanding the words “review for downgrade”.

But certainly on review, yes, the point is that of the last three international rating agencies Moody’s are one notch above the other two. Logic would say that, given the fact that rating agencies apply their minds in similar ways, the likelihood that they could drop their ratings by one notch, to be similar to the other two, must be fairly large. So that’s fairly large – in the order of 30-40%, not necessarily over 50. I would therefore, looking at their reasons, say that I can’t really see why they shouldn’t do so.

It’s interesting that they also mention in a bit of an earlier part of their document that the greatest risks to South Africa’s creditworthiness – and then they qualify that by saying “while still moderate” – are posed by domestic political risks. Full stop. They don’t expand on that, but they just make that statement. That’s quite a strong statement to make.

SIKI MGABADELI: Charl, does that point to the fact that really the Nenegate decision really shook people who watch us closely, more than what many might have anticipated?

CHARL KOCKS: Do you mean what Mr Zuma might have anticipated?

SIKI MGABADELI: Well, I suppose, yes.

CHARL KOCKS: I think so. At the end of the day ratings agencies such as these, looking at a sovereign position, are effectively at some stage saying to Treasury: what do you plan do? – what would you do if? – etc. And to the extent that these answers are rational and obviously followed up later by the action in line with those statements, that gives the rating agency confidence.

What Nenegate did I think to all three is to say to them, well, we don’t necessarily know that the people whom we speak to – say, National Treasury – are close enough to the coal face to be able to give us strong indications of the future.

And then when it comes to hauling back on expenditure by the government, that’s a very strong statement. So Gordhan is going to have a tough time pushing that through. But that’s essentially the way that in the budget speech he said we were going to steer away from the cliff that we are looking at here. So a ratings agency would then say, well, how can he really say that with conviction? Can we actually bank on that?

SIKI MGABADELI: How much faith should be put in the current roadshow that Minister Gordhan is on? He was in London, he is now in Boston, He is going to be going to New York as well, to talk to different investors. Does that make a difference, face-to-face meetings with investors?

CHARL KOCKS: If at home he had the clear backing of the whole cabinet and also the president himself, he would have carried more weight. But now we know that there are signs that he doesn’t actually have that backing to that extent. So the answer is that talking to people and engaging with them is always very, very useful, it will at least give them the opportunity to ask questions, but whether Mr Gordhan can actually categorically tell you that this will happen – that I somehow doubt. He started his speech more or less by saying in October we’ll know what it’s like, or whatever.

We now see this at least seeming problem between him and Mr Moyane and Mr Zuma about that issue, and we haven’t seen strong backing for his position since that speech. So I am rather concerned that the roadshow would not have the full benefit that it could have had.

SIKI MGABADELI: Thanks, Charl, for your time today.

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