PETER ATTARD MONTALTO: Marching to the fiscal cliff on downgrades and vaccine lags

Posted in: Economics, i-Blog, Sovereign risk on November 23, 2020


The point of ratings agencies’ actions is that the risks are rising as the moment is approaching.

This column was first published in Business Day. 

Markets and investors will be only slightly surprised by the double downgrade bonanza at gin-o’clock on Friday evening as within 30 minutes three ratings agencies issued their updates. It will reinforce existing fears and outlooks, although none of the agencies is that specific on a fiscal crisis timing-wise. The point of downgrades, though, is that the risks are rising as the moment approaches.

Domestically there will be the usual uninformed hyperbole against the ratings agencies from the usual suspects. This is amusing and not always unwarranted. Why, for instance, was Moody’s so reluctant to cross the junk boundary but is it now so eager to cut again? It shows they had no understanding of the policy dynamic in recent years. Yet while ratings agencies are painfully backwards looking, often it is a useful crystallisation of views already in place among domestic and foreign investors.

The effects of drifting further into junk are also underappreciated by many in SA — which the Treasury started to hint at in its release after the announcements. Ratings have some automated impact deep into the risk, exposure and counterparty modelling of offshore bank and market markers, which will now create a further drag on SA and its banks.

Rand and dollar bonds that once maybe looked a little undervalued might look fair value now in analysis by investors of a wide range of other countries that is not focused on the detail in SA. These impacts are accumulating slowly but steadily against SA and make funding harder and more expensive.

Vaccine procurement

There is another potential shock factor for SA being watched by investors but that they are not fully aware of yet. The government seems to be seriously lagging behind the global curve on vaccine procurement. There was no mention or monies in the medium-term budget policy statement for this either in the current or next fiscal year. The government’s reliance on overseas development aid to pay for access to the UN’s Covax scheme has fallen through and orders have not been placed for the recently announced efficacious vaccines.

While the president has talked much about options to get access to the Oxford vaccine based on SA’s participation in trials, the government actually has to place the orders. Equally, while Aspen is to manufacture the J&J vaccine partly in Durban, again the government can’t just ask nicely, it has to place some orders.

Why is this important? Business and investors are thinking about the downside risk potential from second and third waves in economies — about those that will be able to stay open with vaccine provisions, and those that will need further lockdowns due to a lack of vaccines. Vaccine orders are being seen as correlated to economic growth in 2021, a crude but not incorrect way of looking at it.

Given the shooting-in-the-foot style of lockdown earlier this year and the continuing inability to wheel out meaningful stimulus, the lack of a vaccine would put SA in a very poor light and worsen fears of economic risk — not to mention humanitarian risk from hunger, which persists; underemployment and inequality.

All levers of stimulus support will be much diminished the next time, making the issue graver still. Fiscal policy simply has no room left and further deterioration in state-owned enterprises (SOEs) will limit it further now and into the future. Monetary policy has slight room but it is very diminished without opening a Pandora’s box of unorthodoxies, which the Reserve Bank won’t entertain. Financial sector policy has some marginal room for additional loosening but buffers are much eroded after the recent crisis, so there is a limit to protect financial stability.  

Turgid prose

Politics is also likely to be more fractious during the next waves given wage freezes in particular (and the job cuts implied). We have seen the head-in-the-sand attitude to the SABC last week. There might be no alternatives to retrenchments. That pragmatic realisation even came to SAA in the end.

The ANC national general council documents released last week showed there are no new ideas at all, just the usual turgid prose. Any document that uses the term “lumpen” in a serious manner should be viewed suspiciously.

At the core of all of this — as we think about future waves and the views of investors, business and the lens of the ratings agencies, which were all united in seeing a limited impact from the Economic Reconstruction and Recovery Plan — is that we are bound by the maths and in need of a new pragmatism about the ideas already on the table.

The fiscal cliff is in sight, albeit perhaps about two-and-a-half years away. Here we come — maybe faster rather than slower if 2021 and future waves are not handled much better.

Attard Montalto is head of Capital Markets Research at Intellidex.

 

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