News just in is that credit rating agency Moody’s has revised SA economic growth lower to 0.7% in 2020 from a previous forecast of 1.0%. Growth for 2021 is forecast at 0.9%, way below the 2.6% economic growth rate required to stabilise the debt to GDP trajectory.
Moody’s said that “slow growth of economic activity is hampering the rate of jobs creation…and…the sub-1% projections reflect our view that the pace of economic activity will remain subdued”. The lower growth reflects the negative impact on manufacturing and mining sectors.
What does this mean for the expected Moody’s downgrade?
· That we are getting closer though it may not be in march given that a few weeks ago a senior rating analyst at the rating agency said that it may be too soon to assess SA’s credit rating given that the outlook changed to negative from stable recently in November last year.
· Markets have already priced this in to a large extend such that we should not expect a disorderly market selloff when the downgrade to sub-investment grade takes place.
· Its not Moody’s that we need to be more concerned about, its S&P and Fitch. The adjustment process following several notches of credit rating downgrade into sub-investment grade deep into sub-investment grade require is more onerous than recovering from a one notch downgrade into sub-investment grade.
· The FTSE government bond index related outflows are estimated between US$3.0bn – US$4.5bn. However, these will be offset by purely yield chasing inflows such that the impact will not last long and will be limited.
· The macroeconomic adjustment will depend on how aggressive the economic reforms are. So far they are too slow.