Moody’s decision ‘cause for concern’

Ethel Hazelhurst

The decision by Moody’s Investors Service to put South Africa on a negative rating watch has touched a nerve at the central bank. Reserve Bank governor Gill Marcus said yesterday that Moody’s decision had been discussed at the bank’s monetary policy committee meeting and described it as a “cause for concern”.

She was responding to a question at a press conference, after the announcement that the bank’s repo rate would remain unchanged at 5.5 percent – as widely expected.

South Africa has an A3 sovereign rating from Moody’s and, on Wednesday, the rating agency changed the country’s outlook from stable to negative. This raises the possibility of a rating downgrade – which would increase the country’s borrowing costs.

“Between now and the next steps on the fiscal side, which would be around the Budget, we need to engage, we need to discuss, we need to understand their thinking better and we will certainly do what we can in that regard,” Marcus said.

Moody’s cited “growing political risks” to South Africa’s policy of restoring the government’s budget deficit – the gap between revenue and spending – to 3 percent of gross domestic product from this year’s 5.5 percent. In February Finance Minister Pravin Gordhan will give more clarity on the three-year outlook, when he updates the government’s rolling budget blueprint.

Gordhan has already twice revised the deficit projections, giving the government more time to cut the budget deficit.

However, the National Treasury disagreed with Moody’s perception that political risks could prevent a return to a sustainable deficit.

On Moody’s decision yesterday to change the outlook of South Africa’s top five banks from stable to negative, Marcus said: “Our exposures to Europe are really negligible.”

She was referring to the dangers of contagion in the event that a sovereign default in the euro zone leaves some of the region’s biggest banks dangerously exposed – and the possible domino effect on other banks globally.

She noted: “Our banks are very sound. We are one of the banking sectors that has not had a crisis so I’m not quite sure what they’re seeing there because it’s not what we see.”

Lesetja Kganyago, the deputy governor at the central bank, pointed out that the ceiling for a country’s institutions was set by its sovereign rating, so all rated entities in the country would automatically have their ratings put on review.

Heading into next year, policymakers will have to make some difficult decisions. In a threatening global environment, domestic risks could trigger investment outflows.

Marcus was asked whether yesterday’s decision by the ANC disciplinary committee to suspend ANC Youth League president Julius Malema, who has advocated nationalisation, could be seen as a response to the Moody’s review. She said she could not speak for the ANC but noted: “You could also ask the question of whether the Moody’s interpretation (of the situation) is accurate.”

Marcus added: “Moody’s must engage with the political leadership of the country and address the issue.”

Christian Esters, the director of Africa sovereign risk at Standard & Poor’s, said the decision would influence investors if calls for nationalisation were to be “toned down” as a result.

Marcus revised the bank’s 2011 growth outlook for the economy down to 3 percent, only weeks after Gordhan estimated 3.1 percent. And it followed the governor’s downward revision in September from 3.7 percent to 3.2 percent.

Most economists expect the repo rate to remain unchanged until late next year. However, Razia Khan, the head of Africa research at Standard Chartered, said a correction from “historically low rates” could come as early as the second quarter – provided there was no “implosion” in the EU.

She said: “For the moment, however, global risks and not domestic developments will be the key determinant of the timing of that eventual rate adjustment.” page 2