New budget statement might spell a bad Moody's rating for SA

South Africa is likely to receive a dismal credit rating from global investor advisory agency Moody’s in light of the recent budget statement from the country’s Finance Minister Tito Mboweni. This is according to Chief Economist at PwC Strategy& Lullu Krugel, who is concerned about the country’s debt levels.

Moody’s is a global credit rating agency that contributes significantly to the functioning of capital markets worldwide, primarily through the research and analysis-based ratings of economies across the globe. Major considerations in the firm’s evaluations include debt instruments and securities.

For the South African market, this criteria spells trouble, particularly in the wake of Tito Mboweni’s latest medium-term budget policy statement (MTBPS). The statement reflects the overall status in the economy at present, given the limited growth rate and struggle with stagnation.

A variety of conditions have placed obstacles in the way of the country’s economic growth.  A dip in oil & commodity prices has been one major issue, while the country’s high rate of unemployment has also hindered progress considerably. At present, the country is busy with developing the necessary skills to meet contemporary market needs.

Mboweni has revised the economic forecast downwards, placing the anticipated economic growth rate for this year at 0.5%. Similarly poor forecasts have been made for the long term, while the revenue projections for the country are equally dismal. High debt rates are likely to make matters worse.

South Africa’s account deficit is currently at 3.5% of the GDP, and the MTBPS has projected that this will remain constant over the next three years, brought about by low domestic demand and consequently low import levels. While most other ratings agencies wrote South Africa two years ago due to these figures, Moody’s have kept South Africa amongst the investment grade markets.

According to Krugel at PwC, this is likely to change with the new ratings. “The MTPBS’s downward revision on economic growth and upward revision in planned state lending will certainly push Moody’s debt metrics beyond critical levels, leading to a downgrade to non-investment grade if the agency wants to maintain its integrity,” said Krugel.

“The only immediate lifebuoy would be if the agency latches on to the multiple promises of change to be revealed in February 2020. The National Treasury uses international benchmarks for structuring its debt portfolio and remains within these limits. Interest, inflation, currency and refinancing risks are under control on accumulated debt,” she added.