South Africa Dodges Moody’s Credit Rating Downgrade

AFRICA’s most industrialised economy South Africa...

AFRICA’s most industrialised economy South Africa just dodged a Moody’s rating downgrade. The change in leadership just earned SA another stay of

execution, hovering one notch above junk, but with the outlook upgraded to stable — signalling cautious optimism about turnaround plans.

A change in the country’s leadership and a national budget that was well received by markets has helped SA escape a credit rating downgrade from Moody’s.

It’s the first verdict on the country’s creditworthiness since President Cyril Ramaphosa assumed office.

Moody’s maintained its sovereign rating for SA at Baa3, one rung above junk status, with a stable outlook.

The rand was unchanged a few minutes after the announcement, last trading at R11.74 to the dollar. It had strengthened earlier in the day from R11.84/$.

“The confirmation of SA's ratings reflects Moody's view that the previous weakening of SA's institutions will gradually reverse under a more transparent and predictable policy framework. The recovery of the country's institutions will, if sustained, gradually support a corresponding recovery in its economy, along with a stabilisation of fiscal strength,” Moody’s said.

Moody’s is the only one of three major ratings agencies that has SA’s foreign currency and rand-denominated debt at investment grade.

A downgrade would have led to SA’s expulsion from the Citi world government bond index and projected outflows of R100bn.

In November, SA received a reprieve from Moody’s when the credit rating agency placed the country ratings on review for a downgrade.

The decision to place the rating on review was prompted by SA’s economic and fiscal challenges including weak growth prospects, material budgetary revenue shortfalls and increased spending pressures.

The review left room for Moody’s to assess the government’s willingness and ability to respond to these rising pressures.

SA has made strides since then, including the election of Ramaphosa, a renewed commitment to fiscal consolidation, and a Cabinet reshuffle that included the return of Finance Minister Nhlanhla Nene and the removal of several ministers whose responsibilities included institutions implicated in state capture, or who were linked to the Gupta family.

Moody’s said the stable outlook reflected a careful balance of risks. “The new administration faces equally significant opportunities and challenges. Steady progress in meeting the objectives set out in the President's recent state of the nation address will be needed if the recovery in confidence that will be essential for the country's economic and fiscal prospects is to be sustained.”

National Treasury welcomed the decision by Moody’s but said it fully recognised Moody’s assessment of challenges and opportunities the country faces in the immediate to long-term.

“To improve SA’s investment and economic prospects, the government continues to work diligently on practical steps to provide the necessary policy certainty such as the finalisation of mining legislation,” Treasury said.

Economic growth accelerated for the first time in four years in 2017, and Nene expects growth forecasts to be revised upwards.

Gross domestic product (GDP) increased by 1.5% in the fourth quarter of 2017 compared with a year earlier. For the year as a whole, economic growth came in at 1.3%, beating Treasury’s forecast of 1%.

Despite the narrow miss, analysts are in agreement that a lot more still needs to be seen in terms of growth, policy certainty and a commitment to fiscal consolidation.

Moody’s is expected to announce its next decision on October 12, giving Ramaphosa ample opportunity to get down to business.