South Africa: Fiscal stability triggers Moody’s outlook upgrade, draws international investors

By Xolisa Phillip, in Johannesburg
Posted on Thursday, 14 April 2022 18:27

Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York
Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York, U.S., November 12, 2021. REUTERS/Andrew Kelly

Fiscal consolidation, improved revenue collection, and debt moderation have earned South Africa a revision on its outlook from negative to stable by Moody’s Investors Service, according to the credit ratings agency.

It may take at least four more years before the country regains its investment-grade rating, but Isaac Matshego, a senior economist at Nedbank, tells The Africa Report, international investors are already returning to the sovereign.

“We don’t need the Moody’s statement to make us realise the National Treasury is committed to stabilising government finances,” says Matshego.

“When Tito Mboweni became finance minister, the National Treasury demonstrated renewed commitment to stabilise government finances, which we have seen continue under Enoch Godongwana,” says Matshego.

“What we see now is the National Treasury we were accustomed to during the Trevor Manuel years,” he says.

In 2018, President Cyril Ramaphosa appointed Mboweni, an orthodox economist and the first black governor of the country’s central bank, finance minister, who brought the country’s coffers under control through a strict process of fiscal consolidation.

Godongwana, Mboweni’s replacement, is a well-respected member of the African National Congress having chaired the governing party’s sub-committee on the economy and been a member of the national executive committee since 1997.

“International fund managers will anticipate the return to investment grade, which will bring them back to our shores,” says Matshego.

Shift in status

“The key driver behind the decision to change the outlook to stable is the improved fiscal outlook that raises the likelihood of the government’s debt burden stabilising over the medium term,” Moody’s said in a statement released at the beginning of April.

“Over the last two fiscal years, the government has shown it was able to re-prioritise its spending while staying committed to fiscal consolidation, which Moody’s expects will remain the case going forwards,” read the statement.

In addition, “tax compliance is likely to improve gradually as SARS [South African Revenue Service] rebuilds some of its capacity after a period of deterioration,” the statement said. For the fiscal year ending March 2022, SARS has recorded preliminary net revenue collections of R1.5tn – R314bn more than the year before.

Leveraging on renewed political and financial stability, South Africa returned to the Eurobond market on Monday 12 April and placed a $3bn bond in two tranches: $1.4bn and $1.6bn maturing in 2032 and 2052, respectively.

The 10-year maturity was priced at a coupon and re-offer yield of 5.875%, 309 basis points above the 10-year US Treasury benchmark. The 30-year maturity was priced at a coupon and re-offer yield of 7.300% – 447 basis points above the 30-year US Treasury benchmark. The bond was 2.4 times oversubscribed.

Following the issue, the National Treasury on Tuesday stated: “The South African government views the success of the transaction as an expression of continued investor confidence in the country’s sound macroeconomic policy framework and prudent fiscal management.”

Debt burden

South Africa’s high debt burden continues to impede cast a shadow on the sovereign’s economic recovery.

The problem with high debt burden is that “… interest payments, the money the state spends on servicing interest and repaying principal on existing debt, … [are] high,” says Matshego.

In the budget, the National Treasury predicts that, in about two years, every 21c collected in taxes will go towards servicing the interest on government debt.

“That is not ideal,” says Matshego. “The government is faced with significant development needs. It’s got to spend as much as it can on development functions, particularly infrastructure development. We need to rehabilitate a lot of our infrastructure.”

Corruption resulted in the country not deriving sufficient benefit from its borrowings.

The challenge for any developing economy is to ensure that the value it derives out of the money it borrows is higher than the cost of that money. “Over the past decade or so was [the case of] government resources being misappropriated,” says Matshego.

Several years of corruption, political negligence and the plundering of public funds under President Zuma led to South Africa losing its credit rating and in April 2017 Fitch became the first ratings agency to downgrade the sovereign to junk. S&P followed suit in November the same year and Moody’s downgraded the sovereign in November 2019.

“Corruption resulted in the country not deriving sufficient benefit from its borrowings,” he says.

Local investors

Before South African debt was rated junk, international investors held more than 40% of South African government bonds.

“What we’ve seen with the downgrades to junk status is the ratio of international investors holding local currency government bonds falling to around 26%,” says Matshego.

The South African government issues bonds predominantly in the local currency, a key strength for the country that allows it to absorb shocks from exchange rate volatility and capital flight. Foreign currency loans constitute about 11% of South African government bonds.

“Local currency issuance is a positive in the sense that South Africa is one of the few emerging-market countries, or developing economies, that can issue bonds in local currency in international markets and still secure significant demand or uptake of those bonds.

“But [local investors’ ability] to absorb government debt is limited – just like in any developing economy,” he says.

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