‘Moody’s waiting to see election results’

With an election only six weeks away and the outcome quite important for future policy direction, it would have been relatively short-sighted of Moody’s to downgrade South Africa’s credit rating on the weekend, says Chris Eddy, Head of Investments at 10X Investments.

“The election is just around the corner and, as usual, the weeks and months preceding it are filled with rhetoric without much action. Post the 8th of May, it will become clear whether rating-positive policies will be implemented,” he said. 

Eddy added that “obviously there is significant concern around Eskom, given the most recent round of load shedding”.

He said the concern was two-fold, firstly around the effect that load-shedding will have on the economy with reduced economic output negatively impacting growth and, secondly, how the current debt overhang from Eskom was negatively affecting the South African fiscal position.

Many people were expecting to see Moody’s change the outlook on South Africa from stable to negative largely because of these concerns around the Eskom crisis.

It is a year since Moody’s upgraded South Africa’s outlook to stable and in that year we have seen growth significantly undershoot. 

“We are through an economic recession,” said Eddy. “Just last week when announcing its decision to keep interest rates unchanged the South African Reserve Bank lowered its growth forecast for the coming year.”

He also pointed to the country’s fiscal position, which had worsened in the year, “with the debt to GDP projected to top out over 60% over the medium term, which is where ratings agencies have drawn a line in the sand”. 

There are also concerns around the ability of the South African Revenue Service to collect revenue efficiently from a narrowing tax base but, Eddy says, the appointment of Edward Kieswetter as the new Sars Commissioner would send a positive signal. 

Kieswetter, who has had a successful foray into the corporate world, was previously Deputy Commissioner for SARS for five years. During this time, he established the Large Business Centre and High Net Worth Individual Unit at Sars, leading to improvements in both compliance and revenue collection. 

Eddy said Kieswetter’s appointment last week could be seen as an affirmation of the government’s commitment to firm up the country’s institutions and root out corruption.

But, overall, he said, the fact that we have election six weeks away is most likely the real reason that Moody’s, historically the most conservative of the rating agencies, has adopted a wait and see approach to downgrading its rating on SA’s ability to pay its debts. 

“They will be waiting to see whether or not government can push through the regulatory reform that is required to support SA’s institutions and spur an economic recovery.”

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