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Aberdeen Asset Management sees Moody’s delaying on South Africa until November

By David Whitehouse
Posted on Thursday, 30 January 2020 13:49

Moody’s is the only rating agency still keeping South Africa above junk. Shutterstock

Moody’s is likely to delay downgrading South Africa to junk until November at least, Kevin Daly, an emerging-market debt manager at Aberdeen Asset Management in London, told The Africa Report.

South Africa’s budget in February is unlikely to prompt a downgrade, he said. The fact that Moody’s waited for so long before moving to a negative outlook on South Africa shows that no “snap decisions” will be made. “They want to give the benefit of the doubt.”

Daly notes that under EU regulations, the end of March and the end of November are possible windows for a rating action. He sees the end of November as “much more likely” timing for the downgrade, which could even be delayed until 2021.

Active fund managers, he says, are already treating South African government debt as “a weak BB credit” due to the country’s lack of growth prospects and the fact that government debt levels “are only going in one direction – up. We as investors disagree” with Moody’s.

Though active funds may already have pulled money out of South Africa in anticipation of a downgrade, Daly notes that passive funds are still invested. A junk rating would mean automatic expulsion from the FTSE World Government Bond index.

It has been estimated that this would mean up to $15bn of passive money being withdrawn.

West African prospects

Emerging-market debt fund managers have a wide range of non-African issuers to choose from. As of the third quarter of 2019, the top 10 holdings in the Aberdeen Emerging Markets Debt Fund did not include any African countries. Daly is cautious on the prospects for African government debt.

Country weights for sub-Saharan countries in the portfolio tend to be between 1% and 2%, he says. “There are more deteriorating than improving credit stories as a whole” in Africa. The liquidity constraints in Africa are a further obstacle, he says. These make it hard for a fund to get money out in the event of a global flight to safety. “Those with the biggest deficits are the ones who come to market.”

Ghana has been able to reduce its fiscal deficit while showing healthy growth rates – but still has a high financing requirement, Daly says.

  • The country’s consolidated deficit, forecast at 6% to 6.5% in 2020, is higher than its fiscal deficit due to energy spending, he says.
  • The history of Ghana’s fiscal deficit shows that it has a tendency to balloon in an election year, such as 2020, he says.

Tax collection capability in sub-Saharan Africa is an even more fundamental problem than liquidity, Daly says. In Ghana, he says, tax revenue to GDP is still towards the low end of the range at 12% to 13%, while in Nigeria it is just 8%. “Revenue mobilisation is key to these countries.”

  • Côte d’Ivoire has shown improvement in fiscal collection, he says.
  • Daly has an overweight position in Côte d’Ivoire, supported by its “very strong growth prospects.”
  • Côte d’Ivoire and Senegal are both “rock solid” stories that are “hard to put a dent in,” Daly says.
  • Growth in Senegal could reach 11% in 2023 once hydrocarbons come on line, he says.

The bottom line: Improved tax collection is the best way for African governments to push their way up the agendas of emerging-market debt funds.