Executive Summary

  • In this short note, we provide a brief background of Moody’s credit rating of the sovereign, a breakdown of the methodology, and our expectations going forward.
  • Currently, risk premiums remain highly compressed. The CDS spread, local bond yields and the USDZAR have all declined or strengthened post the downgrades. Foreign buying of local bonds remains strong. In our view this trend may persist due to the yield-seeking, risk-on environment that we find ourselves in.
  • However, a reversal in foreign sentiment in favour of safe-haven assets would likely result in sharp capital outflows due to foreign sentiment being very fickle. This change in foreign sentiment may be more as a result of global factors rather than any particular local development in our opinion.
  • We remain of the opinion that Moody’s will likely keep the SA LC and FC ratings unchanged at Baa3 with a negative outlook. We believe that this is premised on elevated political risk, a lack of structural reform implementation, a shift in focus to radical economic transformation which may worsen fiscal metrics, a push for nuclear which will likely also worsen fiscal metrics, rising contingent liabilities which would place greater burden on state resources, and deteriorating growth metrics, confidence levels and private sector investment.
  • However, should there be no improvement in the above, we are likely to see SA’s credit rating falling a further notch by 1H18, to Ba1 (both LC and FC). We believe that a further notch downgrade by S&P will also materialise in this instance, thereby removing SA from the Citi World Government Bond index by the middle of 2018.
  • Much depends on the MTBPS which should provide more clarity on the government’s fiscal path – a move away from the previous course may warrant a downgrade at either the November 2017 or June 2018 reviews in our opinion. We favour the latter as we believe it would be prudent to wait for the February 2018 Budget Speech to gain more clarity (in the case of fiscal slippage). We see both S&P and Fitch maintaining their FC and LC credit ratings and the respective outlooks at the upcoming review/s this year. However, pending the outcome of the MTBPS, Fitch could reduce its outlook to negative from stable in the event of material fiscal slippage.
  • Growth is expected to remain benign, while inflation will likely remain below the upper band over the next 12 to 18 months. The SARB remains concerned about the trajectory of the rand – any flare up in political risks could hamper the rand exchange rate, which may feed through to headline CPI. However, despite this concern, the SARB did begin a loosening cycle in July 2017 as inflation has declined, the rand remains relatively stable through the turbulence of 2017, and domestic demand-pull inflation remains absent. As a result, we believe the SARB will provide two more rate cuts of 25bps each by 1H18 in the current cycle.