Rand Report- A Moody review

The time (29 March) has come once again for Moody’s Investor relations to submit a review on South Africa’s sovereign credit rating. The ratings agency is the last (of the major ratings) to maintain South Africa’s local currency denominated debt at an investment grade level, albeit only one notch above “junk”.

Embattled State-Owned Enterprises (SOEs), declining tax revenue and a widening budget deficit, could all be pressures towards a downgrade for South Africa.

Eskom

Eskom is the SOE which poses the most significant threat to economic growth in South Africa and the recent spate of rolling blackouts is unlikely to instill confidence for a Moody’s decision to maintain its investment grade rating on the country.

The ratings agency might however find some solace in the recent decision by president Cyril Ramaphosa to break the power utility into three parts (with the aim of improved accountability and transparency), financial assistance from treasury (without treasury taking on Eskom debt) and news of tariff increases being granted by NERSA (the energy regulator of South Africa).

The National Budget

Moody’s has already given reference to February’s National Budget presented by Mr. Tito Mboweni, as being credit negative for the country. The ratings agency would have drawn concern from Treasury’s suggestion that South Africa’s fiscal deficit could widen to 4.5% in 2019/20 and that the country’s debt is expected to be realized at 60% of Gross Domestic Product (GDP) by 2023/24.

What will Moody’s do?

It is common practice (although not a given) that rating agencies will move on a country’s sovereign outlook before downgrading the regions actual investment rating. It does seem more likely that Moody’s may keep South Africa’s credit rating at investment grade whilst moving the outlook from stable to negative, looking to outcomes from elections, policy (i.e. land expropriation), economic health and Eskom before making any further decision.

If this scenario was to occur, then the next ratings move thereafter is more likely be down rather than up i.e. to sub investment grade (junk).

What if South Africa does get downgraded?

If South Africa was to be downgraded to sub-investment grade by Moody’s, South Africa world be removed from several World Government Bond Indices. This could result in forced selling (of South African Bonds) of up to R140bn. South Africa would then also see the cost of raising capital through debt issuance increased.

The USD/ZAR

In the short term we have seen an upside breakout of the R14.50/$ level for the USD/ZAR. The breakout reinforces that the short to medium term trends remain up (USD strength / ZAR weakness). Near term resistance targets for the currency pair are considered at R14.90/$ and R15.05/$ respectively. A pullback to R14.30 (trendline support) would afford traders not already committed to the long side a second opportunity for long entry. Should the USD/ZAR pair instead move to close below the low at R14.10/$, the bullish indications would be deemed to have failed.