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SA under scrutiny: Moody’s circles amid SOE concerns

We keep shooting ourselves in the foot – Thabi Leoka, Argon Asset Management.

SIKI MGABADELI:  Ratings agency Moody’s put South Africa on review for a downgrade in early April. At the time Moody’s cited a lack of progress with state-owned enterprises as one of its concerns.

The agency has to report back on its review by July at the latest. It said that it’ll be looking closely at prospects for reforms to enhance transparency, accountability and good governance in the state-owned enterprise sector. Moody’s has South Africa two notches above junk status. A one-notch downgrade would keep South Africa on the edge of investment grade; two notches would junk our foreign and local currency ratings of course, with frightening implications.

With all of them circling, what’s to be expected? Let’s chat to economist at Argon Asset Management, Thabi Leoka. Thabi, thanks so much for your time today. I’m almost afraid, because things have moved so much since that ratings review by Moody’s a month ago. We’ve got Brian Molefe back at Eskom and, not only that, fresh allegations of interference in the Glencore saga.

THABI LEOKA:  I think we keep shooting ourselves in the foot because this is the time when we should actually be proving to Moody’s – which hasn’t downgraded us yet –  that we deserve to be investment grade. Moody’s has been publicly concerned about the state-owned enterprises and what it would mean if any one of them defaults, and what it would mean in terms of our contingent liabilities. And if then they can see that there are huge risks in our state-owned enterprises, then it is very likely that they will double-downgrade us.

I definitely expect a downgrade, one downgrade. I don’t expect a double. But I wouldn’t be surprised if they did a double – only because, as you said in your introduction, we have deteriorated quite substantially since the downgrade. That’s not so much in the growth and other fiscal policy perspective, but in the fact that we are a heightened risk from the SOE side, and this is problematic.

SIKI MGABADELI:  I suppose now we have to ask certain questions. There is this talk about all three of the ratings agencies coming to pay us a visit. What are the questions you think they are going to be asking themselves?

THABI LEOKA:  I do know that Fitch is also speaking to three people on South Africa currently. Fitch is based in Hong Kong, so they are not here physically. And their review process, because of their jurisdiction, means that they will review South Africa twice a year. But, unlike S&P, they can’t tell us when in June the outcome of the review will be released because they don’t release a document like the other ratings agencies.

They’ll want to find out how political interference will affect economic implementations and reform. If they see that politics is actually interfering in policy adoption and reform, then it is something that they will be worried about.

And something that they will be worried about is the independence of the Reserve Bank, the Sarb, because all along we’ve been saying that the Sarb and Treasury are sacrosanct and these are the two institutions that will never be undermined. Recently we saw what happened in the Treasury, and we are not certain whether something similar could happen at the Reserve Bank, given that we’ve been left with our jaws open, jaws on the floor, so to speak, with a lot of new things that crept in, unanticipated.

SIKI MGABADELI: We’ll leave it there. Thanks, Thabi. Thabi Leoka is an economist with Argon Asset Management.



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