NEWS & ANALYSIS

Downgrade death row

David Bullard writes on the temporary ratings reprieve from Moody's

OUT TO LUNCH

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The rand hasn’t been having an easy time of late. This provides an enormous challenge for those radio stations, politicians and media commentators who are anxious to be seen as forever positive about South Africa Inc. I heard one financial report a short while back attributing the sudden weakness of the rand to “dollar strength” rather than the more obvious effect stage 4 load shedding was having on the economy.

Of course, in a way this somewhat sanitised explanation is perfectly true. Obviously if the rand is weak against another currency then the other currency must be strong against the rand. But that’s almost as daft as our deputy president’s famous explanation that load shedding is a sign of economic growth and is, therefore, a good thing. Presumably in the same way that ebola is a good thing because it leads to scientific research?

The impending Moody’s assessment of our financial fitness on March 29 was also a factor for rand watchers and there was a collective sigh of relief last Friday when the ratings agency declined to issue a new rating on SA’s debt. Although Moody’s initially gave no reason for the deferment, the optimists saw this as a sign that they are impressed with President Cyril’s firm hand on the financial tiller.

The appointment of a new head of SARS, the ANC muck raking Zondo commission’s very existence and the sudden revelation that travelling to work by train in Johannesburg is a grim experience and “heads will roll” are all cited as reasons for the rating’s agency’s benevolence. Some have also suggested that Treasury officials have been wearing the knees of their trousers to threads with their constant prayers for mercy.

I imagine the reason for the postponement of our financial death sentence has everything to do with the looming election and nothing to do with our financial fitness. In gym terms we are overweight, unable to touch our toes and we get horribly out of breath just getting onto the exercise bike. Of the three ratings agencies Moody’s has been the only one to give South Africa the benefit of the doubt but I imagine even their patience must be wearing a bit thin.

After all, they have a serious job to do and ratings agencies didn’t enjoy a good press when they got the 2008 property crash in the USA wrong. They had been giving the thumbs up to dodgy mortgage backed loans for years and that turned out to be disastrous for their reputation. As one analyst at the time wittily remarked “what is the point of a financial ratings agency when they are so sub-standard and poor at their job?”

The whole point of a credit ratings agency is to assess the risk of a country’s debt and, in simple terms, that means determining whether investors are likely to get their money back on the maturity of a loan. Some will argue that their influence is too great but they are a reality and a country has to live with them. Besides, the type of people who tend not to like the influence of ratings agencies are the very people one might want to avoid lending money to in the first place.

If Moody’s had downgraded South Africa to junk status last Friday they would have obviously opened themselves to accusations of interfering with the election on May 8th. To postpone any decision on our credit rating was the obvious thing to do but that doesn’t mean it’s good news.

As far as many financial analysts are concerned, South Africa is on death row and just waiting for an electric chair to become available. That might be a tad dramatic but one wonders what is likely to impress Moody’s enough to leave us with a Baa3 rating with a stable outlook.

Obviously they will have already crunched the data and carried out extensive research to come to the decision they would have revealed as planned on March 29th. I doubt whether they are going to revisit that task so what happens between now and the eventual date when we will get the news is crucial.

For example, political leaders advocating violence against a section of the South African community if they don’t get their way is unlikely to impress anyone trying to work out whether we are a safe investment bet. When that promise of violence is supported by the South African Human Rights Commission on the basis that no fixed date has been set for slaughter then I think we can assume that might be a negative on the credit rating check list.

Eskom is famously in an appalling financial mess and that isn’t going to be sorted out within the next few weeks so another negative there. But even if Eskom wasn’t in the dire financial straits that years of cronyism and state capture have brought about the fact is that they can no longer provide a reliable supply of electricity.

Stage 4 load shedding came and went very quickly which makes no sense unless you are cynical enough to believe that the ANC will keep the lights on at any cost to the country in the next few weeks just to win another five years in power. But will everything run smoothly after May 8th? Judging by the unavailability of solar panels, inverters, batteries and generators there are plenty of South Africans who don’t think so. People are hunkering down with a siege mentality and have little faith in the government’s ability to either tell the truth or to fix things.

Probably the most important determinant though is going to be the election result. The gallimaufry of crooks, spivs, liars, incompetents and thugs on the ANC approved candidate list should be enough to send up a distress flare to any ratings agency worth their salt. If they get elected for another five years of fiscal plundering then I think we can safely assume that even Moody’s patience will have run out and we’ll be officially junked.

One way we could possibly escape the noose is for President Ramaphosa to announce the immediate setting up of special courts to rapidly try and sentence those politicians and their contacts whose names we have been hearing so much about in the Zondo commission.

It must not be the usual protracted and interminably delayed procedure favoured by the ANC but a swift process carrying the sort of sentence and asset forfeiture that would deter future chancers. This would not only prove hugely popular with long suffering South Africans but might convince a ratings agency that we are serious about mending our ways.

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