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Moody’s downgrade compounds Covid-19 challenges

But could also focus the response.
Cabinet meeting ahead of Finance Minister Tito Mboweni delivering the 2020 Budget Speech and related Bills in the National Assembly, Parliament. Picture: Elmond Jiyane, GCIS

The decision by Moody’s to downgrade South Africa’s sovereign rating to below investment grade was not unexpected. Its timing, however, puts additional pressure on the country’s economy at an already precarious time.

Read: Moody’s junks SA at the ‘worst time’

“I have been expecting this downgrade since the February 2020 national budget,” said Johann Els, chief economist at Old Mutual. “While the budget contained some positive measures, such as the surprise willingness to cut the size of the public sector wage bill, there were many negative factors as well.

“These included the execution risk around the planned reduction in the wage bill and an unsustainably high deficit targeted at the time (-6.8% of GDP),” he noted.

“There was also no evidence for stabilising the debt-to-GDP ratio and lastly – and perhaps most importantly – no credible plan in executing a higher growth path for the South African economy.”

What nobody anticipated last month, however, was the potential that Covid-19 had to further erode the country’s ability to grow its economy.

“My expectations for GDP growth in South Africa this year is now -3.5%,” said Els.

The response

The timing of the downgrade could, however, also have an upside. As Business Unity South Africa (Busa) pointed out in a statement, the country’s response to the coronavirus and how it deals with the implications of Moody’s decision are now inextricably linked.

“We recognise the urgency with which SA must respond to the Moody’s downgrade, but we do, as a country, need to mitigate the immediate economic impact of Covid-19,” Busa noted.

“If we fail in our endeavours to mitigate the negative impact of Covid-19 on our economy, we will be in a far worse position to resuscitate our economy post the Covid-19 crisis, thus making it virtually impossible to rebuild our economy to be rated again as investment grade.”

The Moody’s decision also has real implications for South Africa’s ability to deal with the pandemic.

“Higher borrowing costs for government will crowd out spending on much needed social and economic programmes,” Sanisha Packirisamy, economist at Momentum Investments pointed out. “A further knock to business sentiment could lead to lower rates of fixed investment, weaker growth and increased downward pressure on employment.”

The rand is also likely to weaken further in the short term, which generally means higher inflation. This will limit the Reserve Bank’s ability to be more aggressive in reducing rates to stimulate the economy.

Concurrent and connected

These are not, therefore, two separate issues for the government to deal with. They have to be dealt with together.

Significantly, the steps necessary to rebuild the economy after the impact of Covid-19 and addressing the issues that led to the downgrade are now largely aligned. Structural reforms have to be implemented on a meaningful scale to create an enabling environment for the private sector to stage a recovery, the public sector wage bill must be curtailed to reduce pressure on the national budget, and the wasteful expenditure on state-owned enterprises that do not deliver any social or economic benefit must be cut.

In a statement after Moody’s announcement, National Treasury said that “government remains committed to implementing structural reforms”, but that message is not new. The intention has been stated for some time. What can no longer wait, however, is the implementation.

“The overall phrasing of the National Treasury statement is interesting, basically blaming the rest of government for not doing reform,” noted Peter Attard Montalto, head of capital markets research at Intellidex.

“Indeed the minister, politically, is covered,” Montalto added. “He launched his ‘Tito paper’ last year which would have dealt with many of these issues, he pushed a harder consolidation line into both the medium term budget policy statement and the budget.”

What is required now is for this to translate into action.

“We have come together as a country in the last few weeks to fight the Covid-19 outbreak,” Busa said. “This ‘compact’ must form the platform from which we now address the crisis of the downgrade. We have now got to channel all our resources and capacity to addressing these two crises.”

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With the Covid-19 response there are many own goals in spectacular ANC fashion.

Like.

They have closed all foreign owned food retailers (spaza shops). This racist decision has a huge influence on the length of cues we see in townships. There are thousands of foreign owned spaza shops closed. The nett effect of this our population has additional exposure and risk to the virus thanks to the childish government.

Talking of childish. How childish is it to make it about alcohol and cigarettes. There are people that smoke and drink. What has the virus got to do with that? You can go to the Spar and shop but not buy cigarettes? Do they honestly think everyone will stop smoking and drinking? Or will they go to any length to get what they need. Even if it means more possible exposure.

This mentality will have no chance of fixing the economy. This is the mentality that got it broken.

These people are not clever enough to fix the economy or protect us from this virus.

The Moody’s downgrade is a fitting response to the ANC’s inability, unwillingness or both to implement the structural reforms that everyone knows have to happen for the economy to have any hope of recovering. This government is irredeemably corrupt and incompetent, something that Moody’s has been forced to recognise after giving it umpteen benefits of the doubt.

The never ending MOODYS ENIGMA has finally come to pass thank you. We can now shut this discussion down. Was it priced into the market, obviously, look at the exchange rate and bond yields, apart from an opening spike we are little changed from last weeks numbers. If it was not priced in we would be at 15% yields and 20+ to the $$$.

But lets be honest we have all seen this coming, any 1st year hedge fund squaddie could have hedged this as it was inevitable already in November last year, long before we ever would have heard of covid 19. If i remember my bond trading days, a simple collection of cheap bond way out of the money put options, with a strike well above market rates ruling in November last year and an expiry likely in 2 sets end of March and end of June was the most obvious practice. Some went for more exotic CDS instruments, but i think by end of 2019 most people that i knew with exposure to SA sovereign debt had hedged it for not much more than 1.5% – 2.5% cost to their portfolios. Depending on the leverage and strikes used returns would have been more than comfortable to offset losses or almost completely mitigate them when selling.

The issuers of said instruments would as they always do hedged their positions and spread them around market makers of same – as certain trigger points were hit from mid January through mid March, tranches of the $4 – $8 billion of bonds were likely already being ‘sold off’/ offset, the Q1 sales will be interesting. The point is, the bonds have already been sold or with profits in hand can now be offloaded in a more orderly manner. Everyone can see the SARB in the market i am sure mopping up any potential heavy sellers by showing massive bids to quite a depth.

The prohibition introduced on alcohol and cigarettes is bizarre and will likely compound problems, i want to see the police try and shut down shebeens in town ships where they our out numbered 1000 to 1, they will not even dare enter. In the UK funny enough the off licence (SA bottle store) has now been declared an essential service.

Only a few days into lock down and it is getting very restless. 50 million people under house arrest, at apartheids peak this would have been impossible and not even considered. The uprising and riots would have been impossible to control – what makes us think we can, with now far fewer personnel and equipment.

These SME tax breaks, deferring 20% of PAYE, and all other meaningless token gestures are no trade off for the millions of salaried employees that now have no salaries – this is the proverbial grape in front of a steam roller hoping to halt its progress.

Look at the NICD.co.za website. SA has 7,000 – 12,000 flu deaths annually and around 3.5 million – to 7 million flu cases every year. So far we have Covid cases 1280 and what 4 deaths.

At what stage does a country like SA (in absolutely no position to help themselves and SOEs long before Covid) realise that the alleged solution of lock down and unemploying hundreds of thousands that will never get their jobs back and millions more who will miss a minimum of 3 weeks pay, likely 6 weeks when this is extended – if CR and crew keep on buying into the John Hopkins/ WHO/ CDC/ Imperial college of London (although they seem to be back tracking now) doomsday scenario – it will be self fulfilling prophecy, far more will die in the brewing massive social unrest that is coming (think of the worst uprisings of apartheid and multiply by 10), the unemployment and related food, famine, crime and disease challenges, will dwarf even the doomsday predictions of Covid 19.

The sooner this is lifted and allowed to burn out the better. I am not advocating lives over economic advancement. If this had a 10% mortality or 25% mortality it could be maybe justified but even then, SA has no resources to cover such a situation, they had an economy on life support before Covid and now?

End of comments.

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