Case to up SA credit rating
The likelihood of further downgrades of SA’s sovereign credit ratings in 2018 appear to be remote in the light of recent political developments.
According to researchers at the Pretoria University and North West University (NWU), the current positive sentiment and expectations of economic and political stability should prompt rating agencies to seriously consider upward adjustments of their ratings of SA sovereign debt.
Professor Riaan de Jongh, director of the Centre for Business Mathematics and Informatics at NWU, said credit rating agencies should seriously consider an upward adjustment of SA’s current rating, or at least changing the outlook from negative to positive due to the “forward looking nature” of the sovereign rating.
He believes it will be hard to justify an upward adjustment if credit rating agencies focus largely on historic data and don’t recognise fundamental shifts in SA’s future economic outlook. “The State of the Nation address by President Cyril Ramaphosa is clearly the start of a new beginning and a dramatic turnaround in how the government is going to address deficiencies in exactly those factors that will form the basis of the analyses that the rating agencies use.”
According to Dr Conrad Beyers, Barclays Africa Chair in Actuarial Science at UP, political risks were the driving force behind decisions by some rating agencies to downgrade SA to “junk” status in 2017. Now that politically-related risks, such as large-scale corruption and financial mismanagement, are expected to have less of an impact on the economy, these rating agencies should fundamentally review their ratings, Beyers said.
He pointed out that Fitch and Standard & Poor’s decisions to downgrade SA sovereign debt to sub-investment (junk) grade might be seen as untenable considering indications that the probability of an SA debt default event has decreased significantly. Moody’s decision to follow a waitand-see approach before downgrading SA to junk status appears to be largely vindicated in terms of the credibility of its ratings decisions.
The researchers recognise that significant downside risks associated with the economy remain, including challenges regarding state-owned enterprises and uncertainty regarding the future of property rights, but current developments point to a significantly lower likelihood of an SA sovereign default event. A more business-friendly environment, non-interference in the financial system and guarantees of the independence of the judiciary and Treasury can be seen as significantly credit positive.
Through upward adjustments in their credit outlook for SA, rating agencies will add to the positive sentiment currently flooding through SA and encourage the international community to consider investing here.