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Pictet's senior economist believes South Africa could face downgrade from Moody's

News Team, 27/09/2019

Pictet Asset Management’s (Pictet) senior economist Sabrina Khanniche believes that South Africa’s economy remains under significant pressure, with a possible downgrade from ratings agency Moody’s potentially compounding its current difficulties.

In a new commentary piece, Ms Khanniche suggests that the the historical relationship between Pictet’s proprietary public debt sustainability score and the agency’s rating moves, suggests it is possible that Moody's could relegate South Africa to non-investment grade on 1 November. In particular, Pictet’s data suggests that South Africa continues to displays weak debt dynamics, especially versus its peers.

As it stands, Moody’s is the only major credit rating agency that has not yet given the country a non-investment grade status. Ms Khanniche notes that Fitch Ratings and S and P Global both cut the country’s credit rating to ‘junk’ in April 2017, when Pravin Gordhan was dismissed as finance minister.

These issues are heightened by wider, long term issues concerning both debt levels and financing challenges. Ms Khanniche argues that Pictet’s information shows that its ability to reduce debt through economic growth is limited, with a highly negative growth/interest rate differential. Meanwhile, the debt-finance ability (i.e. the funding capacity of the private sector) remains weak, as a consequence of disappointing economic growth which has resulted in lower government revenue collection.

Ms Khanniche argues that the situation is set to worsen with state-owned enterprises (SOEs) requiring significant cash inflows. The government has recently had to pump ZAR 59 billion ($ 4 billion) through the end of the 2020/21 fiscal into Eskom, the country’s largest electricity company.  This is in addition to the ZAR 230 billion bailout funds already allocated in this year's budget for the next ten years. Other SOEs are facing difficulties include South African Airways, South African Broadcasting Corporation and Denel, which may soon require emergency funding.

Forecasting the future, Ms Khanniche said: “We also believe a downgrade to non-investment grade would trigger capital outflows. This could in turn lead to a depreciation of the currency, especially as the South African rand is nearly the most overvalued currency in emerging markets. South Africa’s economy has been ailing, getting worse over time with rising needs for foreign financing. 

"As things stand, we don’t believe in the country’s ability to decrease its debt burden, especially with lacklustre economic growth, also illustrated by the growing number of SOEs seeking financial support. A downgrade by Moody’s as a non-investment grade on 1 November would certainly make the situation even harder for the country to handle. Strong measures by the Ramaphosa government are urgently needed for a change.”

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