Michael Metelits
The big news this week was the retention of investment grade ratings by Moody’s Investor Services for South Africa’s foreign currency debt and deposits.
Moody’s action is a stamp of approval on local macro-economic policy. Their ratings, and those of other international agencies, are the first level of information used by international investors.
Supplemented, one hopes, with further research, the bond rating tells investors how likely a country is to default on its loans. Many international organisations are not allowed to invest in countries which do not have an investment-grade risk rating.
Analysts at Moody’s and other agencies like Fitch IBCA are in the business of deciding how likely it is that debts will be repaid, and whether deposits are secure. When an investor buys a bond, she or he is lending money, and the bond rating is a measure of how likely it is that the interest and principal will be paid back.
In retaining Baa “investment grade” ratings for South Africa’s debt and deposits, Moody’s cited “disciplined macro-economic policy architecture”, meaning the will to maintain high interest rates in the face of demands to loosen up credit and promote growth. The financial sector’s response to the international liquidity crisis was also mentioned, as were the soundness of the domestic banking system and political stability.
Moody’s ratings system extends from Aaa “gilts” – the so-called triple-A rating – down through Aa, A, Baa, Ba, B, Caa, and C. At Baa, investments “lack outstanding investment characteristics and … have speculative characteristics”, according to Moody’s. B, Caa and C are “speculative”, or in less polite terms, junk.
So South Africa is on the edge of “investment grade”, and if the country slips, it could have profound repercussions on foreign investment. Conversely, if Fitch IBCA or Standard & Poor’s raised South Africa’s rating, more money would probably flow in.
However, Chris Pryce, a director at Fitch IBCA in London, disagrees with Moody’s, placing South Africa significantly below investment grade.
Pryce confirms that analysts look at everything they can about a country when issuing ratings, but feels that unemployment and South Africa’s short- term debt increase the likelihood of “something going very wrong very quickly”. It could be a sharp currency move or social unrest and political instability, leading to a lower chance that debts and deposits will be secure.
The Reserve Bank’s recent rand defence plays a large role in Fitch IBCA’s rating.