Amidst the uncertainties that a ratings downgrade brings, you shouldn’t lose sight of the big picture. Downgrades can be followed by upgrades – if business leaders like you maintain a steady hand on the wheel.
As expected by numerous stakeholders in the local (and global) business sector, Moody's altered SA's investment rating by one notch in June 2017. SA remains at investment grade, but is that enough?
Moody’s decision to downgrade SA’s economic standing follows similar decisions made by Standard & Poor (S&P) and Fitch in April this year – following on from a Cabinet reshuffle that raised uncertainties over the country’s leadership.
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“A positive feature of Moody's decision [to downgrade SA] still leaves the country in the important global bond index, which has significant implications for borrowing costs,” IOL’s Business reporters say. “This grants SA breathing space and gives scope for remedial policies and actions.” Business insiders offer a word of caution, though: “It is a warning for SA to get its house in order.”
It’s important to remember that economic-status upgrades and downgrades come and go in cycles. Sure, SA’s been bearing the brunt of a few downgrades in recent months, but it’s actually not ‘all downhill’ from here.
If you’re perplexed by the matters surrounding South Africa’s economic status, here are a few insights on what it really means and how it might affect you and your business:
What does Baa3 really mean?
Moody's downgraded South Africa's debt rating to Baa3 from Baa2. “South Africa avoided being downgraded to junk by Moody’s,” CNBC Africa reports. “Instead the ratings agency downgraded the country one notch with a negative outlook. It is now one notch above sub-investment grade or junk status. This was expected by the market (given the earlier downgrades by S&P and Fitch).
Moody’s says the key drivers that influenced their ratings downgrade included:
- Poor medium-term growth prospects due to structural weaknesses.
- On-going energy shortages as well as rising interest rates.
- Further deterioration in the investor climate and a less supportive capital market environment, which is a concern considering the fact that South Africa is highly-dependent on external capital.
According to Moody’s, the assignment of a stable outlook reflects policymakers' commitment to reining in government debt growth over the medium term and the broad political support for a macroeconomic strategy, including the National Development Plan (NDP), tighter monetary policy and fiscal restraint, which should help stabilise the debt burden over the medium term.
Downgrades and its impact on business growth
Moody's says that successful execution of planned state structural reforms like the National Development Plan can help SA bounce back from its negative ranking. If the rand continues to strengthen, enhanced business growth can be achieved too.
“In contrast, though, South Africa's ratings could be downgraded if the official commitment to fiscal consolidation and debt stabilisation falters, or if the investment climate deteriorates further, limiting the availability of external financing for the current account deficit,” the agency’s representatives add.
According to business correspondent Ray White at EWN:
“Moody’s actually placed South Africa on review for a downgrade in April after finance minister Pravin Gordhan and his deputy were relieved from duty. GDP contracted by 0.7% in the first quarter, along with a contraction on 0.3% in the last three months of 2016. Finance Minister Malusi Gigaba has called for a meeting with business leaders soon to come up with a strategy to improve overall business confidence.”
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Move forward despite the uncertainty
A ratings downgrade does affect businesses – across sectors and lifestages – but it doesn’t mean it’s the end of the road. Yes, borrowing money will be a little more expensive on the interest side, as money lenders and investors remain wary of the future, but you can unlock funds to grow if you have the right strategic plan in place.
To ensure you aren’t caught without cash in this ratings downgrade cycle, Standard Bank’s specialists can assist you by provisioning the right overdrafts, business loans, and cost-effective fleet and insurance packages to keep your company’s cogs turning.
“Moody's latest decision on SA's investment rating must be seen as a warning, not a reprieve,” says North West University’s School of Business and Governance Economist, Prof Raymond Parsons. “Restoring SA's investment credentials will require tangible and urgent progress on issues like rebuilding investor confidence, maintaining viable public finances and strengthening institutions in the period ahead.” The rating agencies will be visiting SA again at the end of the year and if conditions do not improve over the next few months he says it might lead to another downgrade.