Op-Ed: Moody’s sober outlook for SA encouraging

Posted on September 14, 2018

Moody’s view on South Africa’s current and future economic environment will help to allay fears that the country is facing a shocking downgrade to junk status in 2018.

A senior Moody’s representative, Lucie Villa, noted that their view of South Africa’s economy “hasn’t changed drastically” since their previous ratings decision in March 2018. In addition, Moody’s noted that the country has to stabilise its debt to prevent a ratings cut back to negative.

According to Dr Conrad Beyers, Absa Chair in Actuarial Science at the University of Pretoria, Villa’s statements send two important signals to the market. First, it indicates that there will likely not be a change to South Africa’s credit rating in the near future. Secondly, Moody’s signals that a future negative assessment of the country’s rating will likely not lead to a full downgrade to junk status, but rather only an adjustment to a negative outlook.

According to Beyers, Moody’s position is consistent with their reputation of not over-reacting to short-term market fluctuations or sentiment. “In a time where many asset managers do not attach much credibility to the assessments of rating agencies, Moody’s realistic and sober assessment of South Africa’s rating will reflect positively on the company.”

Research conducted at the University of Pretoria of credit ratings worldwide shows that some rating agencies use macro-economic factors that go back two or more years into the past when making ratings decisions. This is in line with Moody’s latest comments that some future negative developments, such as the mini-budget in October 2018, have already been factored into their assessments.

Although Moody’s points towards frustration with slow progress on structural reforms, it notes that the government has tackled some problems that will emerge. It is likely that Moody’s takes into account the fact that President Cyril Ramaphosa has been in office for only seven months, and that some reforms could take considerable time to manifest into positive economic outcomes.

There are currently two focal points where impulsive and populist government policy can push the economic system beyond critical points and lead to severe downgrades. The management of land reform (property rights) as well as the independence of the South African Reserve Bank lie at the heart of economic confidence in the country. Any tampering with property rights or the "bank of people", even if it is just rhetoric, could have consequences that can quickly get out of control.

Note: The University of Pretoria hosts the Absa Chair in Actuarial Science – the views expressed by the holder of the Chair do not aim to represent any stance or viewpoint of Absa.

- Author Dr Conrad Beyers

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