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Budget: Mboweni lightens the mood but will it be enough for Moody’s?

Moody’s seemingly inevitable downgrade of SA’s sovereign credit rating in late March could be held at bay, some economists believe.

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Given that the Finance Minister’s Budget Speech has turned out to be slightly better than widely anticipated and improved the frame of mind of many South Africans, has it lightened the mood at Moody’s too?

The global ratings agency is due to announce in late March whether it will lower our sovereign debt rating from Baa3 negative to junk status.

As always, economic analysts have a variety of opinions as to whether the Finance Minister and his Treasury team have done enough to earn the country at least a temporary stay of execution. Should Moody’s leave the rating unchanged this time around, it will revisit the situation again in late 2020.

The ratings agency may give us a bit more breathing space

Kevin Lings, chief economist at Stanlib, is one of those who believe the axe may not fall just yet.

“At this stage, we expect Moody’s to give South Africa more breathing space until much later in 2020 in order to determine if the government is able to be effective in meeting its expenditure objectives, more specifically controlling it salary costs,” he says.

Annabel Bishop, chief economist at Investec, agrees. “While Moody’s could downgrade SA on the strength of this budget alone, it has recently said it is not in a rush to do so and could well wait until November for a final rating decision, if not in 2021,” she said.

Bishop predicts that SA will likely remain on a negative outlook at Moody’s country review on 27th March.

Mboweni’s bold pronouncement is by no means certain

Reza Hendrickse, portfolio manager at PPS Investments, thinks it’s going to be a close call. “Finance minister Tito Mboweni boldly commented that he thought the budget did enough to maintain Moody’s patience, but this is by no means certain,” he said.

“It is sobering that despite this years’ positive budget interventions, the current 65% debt to GDP level is still projected to exceed 70% by 2023, which remains on the path towards unsustainable levels. Even with the positivity on the surface of this year’s Budget, the reality is that we may still only be tinkering at the margin if we consider the current debt trajectory.

“It is a close call as to whether Moody’s will once again give us the benefit of the doubt,” Hendrickse observed.

Johann Els, Old Mutual Investment Group chief economist, believes a downgrade is inevitable.

Many positives in the Budget, but it’s too little too late

While the Budget was better than expected and the positives outweigh the negatives, it was probably not good enough for Moody’s and I expect South Africa’s sovereign rating to be downgraded in March,” Els said.

He added that there was a small probability that Moody’s could delay its decision to see how wage negotiations with unions pan out.