Executive Summary

  • In this short note, we provide a brief background of Moody’s and S&P’s credit rating of the sovereign, a breakdown of the methodology, recent developments and our expectations going forward.
  • We believe the fiscal slippage scenario presented in the 2017 MTBPS represents a material deviation from the previous policy of fiscal consolidation, and that this will likely be the primary reason for credit rating downgrades over the medium-term.
  • Both Moody’s and S&P will likely reduce their fiscal assessment scores, given a broad-based deterioration in the country’s fiscal metrics. This would therefore imply a category shift in their assessments of the country’s fiscal strength (or a lack thereof). A deterioration in the agencies’ economic assessments is also likely, which would imply a category shift in both Moody’s and S&P’s assessment of the macroeconomic risks built into their baseline forecasts.
  • We believe the above two changes would be the key reasons for a downgrade in the LC and FC credit ratings of both Moody’s and S&P.
  • Given the political turmoil currently being experienced, we could see the Institutional assessment changed to ‘weak’ from the current ‘neutral’. This would all but solidify a downgrade.
  • Other changes envisioned in the coming month: S&P could decide to eliminate the one-notch uplift it provides to the LC rating . This is because the fiscal assessment (we believe) is already more than 1-point weaker than the average of the other four assessments. To keep a one-notch uplift requires that the fiscal assessment alone is not more than one point weaker than the average of the other categories. This would imply a two-notch downgrade to the LC rating.
  • Fitch is expected to lower its outlook to ‘negative’ from stable currently. Fitch has expressed “shock” at the deviation of the MTBPS from the previous path of prudent fiscal consolidation.
  • Both lower potential growth and a deteriorating fiscal outlook remain credit-negatives in our view. This, combined with a structural reform deficit, would further reinforce the low growth expectation. The lack of private sector investment, a lack of capital mobility within SA, and limited political commitment to growth-enhancing structural reform implementation will probably keep SA on a low growth path, with all of the above a virtuous cycle or a feedback loop.
  • The current environment has proven that there is a lack of focus on growth-enhancing policy prioritisation, given the skew in focus to political developments. We are likely to see SA’s credit rating fall a notch over the coming month (Moody’s) to Ba1, with S&P falling to BB (both LC and FC). This would necessitate the removal of SA bonds from the Citi WGBI, and may result in outflows of between R80 to R120 billion.