Credit ratings: On the bright side

Moody’s credit rating agency thinks finance minister Pravin Gordhan is likely to remain in his post and that SA’s institutions remain inherently strong, despite the rise in political contestation.

This was the view expressed by senior Moody’s analysts at its annual credit risk conference in Johannesburg this week.

"We think he [Gordhan] is standing strong," said Kristin Lindow, Moody’s senior vice-president (sovereign risk) during a press briefing. "If we had to come out on one side or another, we’d be pretty confident that he’d be likely to stay."

Moody’s representatives are in SA to review its prospects with a view to updating its ratings on November 25. It has SA’s foreign currency rating pegged at Baa2 — two notches above junk status — but with a negative outlook.

Lindow said it was clear that political divisions had been building, judging from SA’s faltering business confidence, which was now almost as low as during the global financial crisis.

In fact, political divisions have now replaced low growth and debt-stabilisation challenges as SA’s number one credit weakness, in Moody’s opinion.

Despite the resurgence in political noise, Moody’s analysts said they had confirmed SA’s rating in May because they expected further progress. This has not changed.

Moody’s still expects SA’s debt-to-GDP ratio to stabilise as early as this year and then to start to decline. It is also optimistic that growth is starting to turn up, given that commodity prices have begun to revive.

And SA has made progress in closing its energy gap — something that had shaved one percentage point off SA’s growth rate in recent years.

"What’s important is that growth starts bottoming out, starts rising and is sustainable," said Zuzana Brixiova, Moody’s new senior analyst on SA.

Moody’s expects growth to recover very gradually back up to 2% by 2018, but is looking for growth of just 0.2% this year.

It will probably downgrade SA in the absence of a growth recovery, the continued accumulation of debt, or if political divisions impede government’s reform efforts.

In essence, whether Moody’s downgrades SA in November depends on whether government sticks to its fiscal consolidation path and delivers on its commitment to improving labour market flexibility and containing the contingent liabilities of state-owned enterprises.