Moody’s retains SA credit rating
It stays unchanged at Baa3
MOODY’S Investors Service’s decision to keep South Africa’s credit rating at investment grade, now with a stable outlook, is a boost for President Cyril Ramaphosa’s efforts to salvage the integrity of key state-owned institutions.
Moody’s kept South Africa’s foreign and local currency rating unchanged at Baa3, in line with expectations, leaving the country’s inclusion in the Citigroup World Government Bond Index unscathed.
Leaders of business organisations including Cas Coovadia, managing director of the Banking Association of South Africa, welcomed the decision. Coovadia said all South Africans – business and consumers – would benefit from this show of confidence in the progress the country has made in addressing some of the concerns previously raised by the rating agency.
“Another sovereign credit rating downgrade would have inevitably been reflected in the ratings of South Africa’s banks, and increased the cost of borrowing for the country, companies and financial institutions, as well as making it harder to secure essential investment. In the end, all South Africans would have felt the burden.”
Bonang Mohale, Business Leadership South Africa, said: “This decision gives us another opportunity to roll up our sleeves and reflect on socio-economic challenges facing our nation.”
The decision follows a Treasury-led investor roadshow where South Africa gave assurances that it was open for business.
Investec Bank chief economist in South Africa, Annabel Bishop, said the decision was expected, as the agency built the market and business euphoria resulting from the election of Cyril Ramaphosa to ANC and South African President into its analysis of the country, moving the outlook from negative to stable.
“A shift to a positive outlook, which signals a rating upgrade, will be dependent on deliverables, however, in terms of sustained robust economic growth, improved institutional strengths and meaningful fiscal consolidation,” Bishop said.
Moody’s made the announcement late on Friday after placing South Africa on a threemonth review for a downgrade in November, following the Medium Term Budget Policy Statement (MTBPS) in October which painted a bleak picture.
The MTBPS unveiled that South Africa had breached the expenditure ceiling, and that debt and guarantees combined are above 60 percent of gross domestic product (GDP).
Moody’s was the last major rating agency to hold the country’s debt at investment grade.
Moody’s decision to keep South Africa’s foreign and local currency rating unchanged at Baa3 leaves the country eligible for inclusion in the Citigroup World Government Bond Index.
It cited that the main reason behind its rating decision was a likely return to a more transparent and predictable policy-making environment. It also attributed its decison to the halt in the deterioration of the country’s institutional framework, with long-standing strengths preserved and some rebuilding occurring.
“The recent change in political leadership appears to have halted the gradual erosion of the strength of South Africa’s institutions. With changes in governance, a number of key institutions, including the Treasury, the South African Revenue Service and key state-owned enterprises have embarked on the recovery of their earlier strength.”
Moody’s mentioned that the recent change in political leadership offered a real prospect of a decisive reversal in that erosion of strength. In terms of its stable outlook, Moody’s said that South Africa’s economy had significant growth potential. Moody’s expected the recently-announced one percentage point increase in VAT would broaden the fiscal policy response beyond the expenditure controls on which the government has increasingly relied in recent years.
“Overall, Moody’s now expects the government’s debt burden to stabilise at around 55 percent of GDP over the 20182020 period”.
Moodys also warned that a resolution to the mining charter debate and a balanced approach to land restitution will test the new administration’s ability to address conflicting political priorities.