A downgrade by ratings agency Moody's tonight, although unlikely, would spell disaster for the country.
And that’s precisely why it won’t happen.
It would send government's already overstretched annual interest bill of R180bn on existing borrowing even higher and make it increasingly difficult for it and businesses to raise money in capital markets. It would put paid to the current surge in optimism sweeping the country after Cyril Ramaphosa’s successful ousting of Jacob Zuma from power and would have negative consequences for all South Africans.
The reality is the new Ramaphosa administration has done enough to convince Moody's that it means business in restoring the country’s economic credibility.
Politics and business make uneasy bedfellows but their fortunes are always intertwined.
Retiring Investec CEO Stephen Koseff recalls negotiating a deal in the early 90s with then Barclays chairman Andrew Buxton. FW de Klerk had just called a referendum on whether his government should continue with peaceful negotiations with the ANC or not. Buxton told Koseff that the deal they were poised to sign was dependent on the country delivering a “Yes” vote. As it turned out, 68% of white South Africans who participated in the vote chose change - and with that the path to democracy was secured and Investec gained a beachhead in the UK, which it has used effectively to become one of its biggest wealth managers in that country over the past quarter of a century.
In South Africa, stable politics is a key determinant of economic and business success.
It’s increasingly apparent that President Cyril Ramaphosa has used the three months since his election as ANC leader, and the exit of the former president Jacob Zuma, from office a month ago, to restore sufficient confidence to avert the slide.
Moody's is likely to leave its assessment of South Africa’s economic prospects unchanged when it makes its announcement later tonight. Despite worries about the uncertainty around land reform and the shape of the economy into the future, Moody's is likely to take into account the significant positive steps the new administration has taken by putting reliable pairs of hands in charge of critical economic ministries and the changes wrought at the bottomless money pits at Eskom and SAA.
A downgrade by Moody's would confirm the position taken already by Fitch and S&P Global to downgrade South Africa to sub-investment grade. Moody's is the last of the big three global ratings agencies to list South Africa as “investment grade” and its patience and trust that despite the country’s fractious descent toward socio-political meltdown, has allowed it to retain its precarious grasp on investment grade.
Without the support of Moody's, billions of rand would have been forced to leave the country by now. Moody's is likely to continue that support. Neither it, nor the many investors who are guided by ratings agency pronouncements on countries, want to see South Africa fail.
A downgrade tonight could prove to be a tipping point. The first thing to go would be the rand, which in turn would push up inflation, and despite this week's 4% inflation number and stronger rand which point to as much as a 50 basis point cut in interest rates next week, the recovery would stall.
So much is riding on Moody's. Trust they will do the right thing and that we might just pull ourselves back from the brink of disaster.