Moody’s moves South Africa one step closer to ‘junk’ status

Hundreds of people originally from various countries are seen outside the Methodist Church where they have taken refuge after being chased away from a corridor close to the offices of the United Nations High Commission for Refugees(UNHCR) in Cape Town, on October 31, 2019. They are asking the UNHCR to intervene on their behalf. They say they don't feel safe in South Africa anymore due to high levels of crime as well as xenophobia. (AFP / RODGER BOSCH)
Updated 02 November 2019

Moody’s moves South Africa one step closer to ‘junk’ status

JOHANNESBURG: Ratings agency Moody’s moved South Africa one step closer to “junk” status on Friday by revising the outlook on the country’s last investment-grade credit rating to “negative” because of a slowdown in economic growth and rising debt burden.
Analysts had expected the outlook revision on the ‘Baa3’ rating, the lowest rung of investment grade, after a bleak mid-term budget statement this week that slashed this year’s growth forecast to 0.5% and showed government debt racing to more than 70% of gross domestic product by 2023.
S&P Global and Fitch already have South Africa’s debt in sub-investment grade.
“The negative outlook signals in part Moody’s rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth,” Moody’s said in a statement after South African financial markets had closed.
“The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level,” the agency added.
The negative outlook means there is a window of 12-18 months in which a downgrade could be delivered.
A move to “junk status” typically increases a government’s cost of borrowing by raising the premium that investors demand to hold its debt.
A downgrade to sub-investment grade could also see South Africa evicted from the benchmark World Government Bond Index of local currency debt, which could trigger billions of dollars of passive outflows.
Phoenix Kalen, director of emerging markets strategy at Societe Generale, said South Africa was now in the “last-chance saloon” and that it had to stabilize its debt trajectory.
“This will be a Herculean task,” Kalen said, citing financial pressures at state-owned companies among causes for concern.
The South African government has been forced into repeated bailouts of state companies such as struggling power firm Eskom, which is due to receive more than 100 billion rand ($6.65 billion) of state money over the next two fiscal years.


US trade offensive takes out WTO as global arbiter

Updated 10 December 2019

US trade offensive takes out WTO as global arbiter

  • Two years after starting to block appointments, the US will finally paralyze the WTO’s Appellate Body
  • Two of three members of Appellate Body exit and leave it unable to issue rulings

BRUSSELS: US disruption of the global economic order reaches a major milestone on Tuesday as the World Trade Organization (WTO) loses its ability to intervene in trade wars, threatening the future of the Geneva-based body.
Two years after starting to block appointments, the United States will finally paralyze the WTO’s Appellate Body, which acts as the supreme court for international trade, as two of three members exit and leave it unable to issue rulings.
Major trade disputes, including the US conflict with China and metal tariffs imposed by US President Donald Trump, will not be resolved by the global trade arbiter.
Stephen Vaughn, who served as general counsel to the US Trade Representative during Trump’s first two years, said many disputes would be settled in future by negotiations.
Critics say this means a return to a post-war period of inconsistent settlements, problems the WTO’s creation in 1995 was designed to fix.
The EU ambassador to the WTO told counterparts in Geneva on Monday the Appellate Body’s paralysis risked creating a system of economic relations based on power rather than rules.
The crippling of dispute settlement comes as the WTO also struggles in its other major role of opening markets.
The WTO club of 164 has not produced any international accord since abandoning “Doha Round” negotiations in 2015.
Trade-restrictive measures among the G20 group of largest economies are at historic highs, compounded by Trump’s “America First” agenda and the trade war with China.
Phil Hogan, the European Union’s new trade commissioner, said on Friday the WTO was no longer fit for purpose and in dire need of reforms going beyond just fixing the appeals mechanism.
For developed countries, in particular, the WTO’s rules must change to take account of state-controlled enterprises.
In 2017, Japan brought together the United States and the European Union in a joint bid to set new global rules on state subsidies and forced technology transfers.
The US is also pushing to limit the ability of WTO members to grant themselves developing status, which for example gives them longer to implement WTO agreements.
Such “developing countries” include Singapore and Israel, but China is the clear focus.
US Commerce Secretary Wilbur Ross told Reuters last week the United States wanted to end concessions given to then struggling economies that were no longer appropriate.
“We’ve been spoiling countries for a very, very long time, so naturally they’re pushing back as we try to change things,” he said.
The trouble with WTO reform is that changes require consensus to pass. That includes Chinese backing.
Beijing has published its own reform proposals with a string of grievances against US actions. Reform should resolve crucial issues threatening the WTO’s existence, while preserving the interests of developing countries.
Many observers believe the WTO faces a pivotal moment in mid-2020 when its trade ministers gather in a drive to push through a multinational deal — on cutting fishing subsidies.
“It’s not the WTO that will save the fish. It’s the fish that are going to save the WTO,” said one ambassador.