THE decision by Moody’s to cut SA’s sovereign debt rating may have surprised Finance Minister Pravin Gordhan and the markets, but it was not completely unexpected. The move puts Moody’s Baa1 rating in line with those of its two main rivals, Standard & Poor’s and Fitch.
What took markets by surprise was the timing of the decision, which preceded the Treasury’s medium-term budget policy statement later this month and the electoral conference of the African National Congress (ANC) in Mangaung in December. These two events should provide clarity by January on a range of debt and fiscal policy issues, as well as any changes to broad economic policy — the big issues ratings agencies concentrate on when making decisions.
Ominously, Moody’s kept a negative outlook on its new rating, which is also on par with the outlooks set by the other two global rating agencies. Moody’s made it clear it would not hesitate to downgrade SA again if the ANC conference responds to calls for "more radical policies" and "decisive" government action to speed up transformation of the economy. The agency warned this would inevitably lead to more state intervention, which would deter private investment and incoming capital.
These comments highlight the fact that all three rating agencies will keep a close watch on the conference and will move swiftly to downgrade SA if those concerns materialise. Standard & Poor’s struck another sombre note soon after the Moody’s announcement last week, saying that since it assigned a negative outlook to its BBB+ rating for SA in March, "the news flow has not been good".
The agency also said it was very difficult to see the kind of "positive game-changer" needed to improve economic growth and investment prospects as well as foster the faster fiscal consolidation that would offset rising public sector debt.
The other shock of the downgrade was that Moody’s dwelled on what it sees as the government’s "reduced capacity" to handle the prevailing political and economic situation. The "fractious domestic environment" was not conducive to the reforms outlined in the National Development Plan, it said. This lack of confidence stems from the heated debate on contentious issues such as nationalisation, and the dysfunctional relationship between workers, unions and business in the wake of violent protests at Lonmin’s Marikana platinum mine.
The unrest has been spreading to other mines and industries and will hamper the economy’s growth and competitiveness if it continues, especially if it results in the kind of double-digit wage hikes Lonmin had to concede to end its strike. Even as Moody’s was preparing its announcement, Impala Platinum, which was forced to shut its operations for six weeks in January and February due to an unprotected strike that led to a 10% wage increase, revealed that it had granted a further increase averaging about 5% to avert another strike.
Moody’s pointed out that the mining turmoil has finally made foreign investors sit up and take notice of SA’s entrenched social problems, which have been shoved into the background for years, largely because of the extent of the ANC’s political support and SA’s prudent financial policies.
If anything can be criticised in the thinking behind the Moody’s downgrade, it is the reference it makes to SA’s "reduced room for manoeuvre" in its fiscal policies.
So far, the Treasury has managed to balance the need for spending on infrastructure and social welfare with the kind of budget discipline favoured by investors.
As far as the Treasury is concerned, this is not going to change. The trouble is that divisions in the ANC mean there is no guarantee the Treasury will have the influence to contest any new, economically questionable decisions that may be taken by the ANC in December. The issues spooking investors ahead of the ANC conference stem from the heated policy debates taking place both within the party and with its alliance partners.
The foundations of the economic policies that have won SA credibility since the end of apartheid, and the role of the Reserve Bank, are up for discussion at Mangaung. In addition, some form of nationalisation in the mining sector — not a wholesale asset grab — is almost certainly on the cards, while a new tax on mining profits looks increasingly likely.
ANC secretary-general Gwede Mantashe claimed after the Moody’s downgrade that the private sector was "on strike" and not creating jobs, necessitating increased state intervention in the economy. This is simply not true, although it is the case that private companies are wary of investing in the existing political environment — with good reason. The Moody’s decision should be a wake-up call for the party. Unfortunately, with all the political jockeying, it is not apparent that introspection is high on the agenda. It is, therefore, unlikely there will be any decisive policy rethink on the part of government soon that could reassure investors and persuade rating agencies to protect SA’s current credit ratings. As things stand, the opposite is, unfortunately, more likely.