Moody's sees no danger to SA's credit rating

Recent financial-market turmoil will not impact South Africa’s Baa1 credit rating, which is backed by low external debt ratios and solid fiscal position, Moody’s analyst Kristin Lindow said on Thursday.

Lindow told Reuters in a telephone interview the rating, changed at the start of last year and carrying a stable outlook, had already taken into account potential exchange-rate volatility and a wide current-account deficit.

“[South Africa] has managed its policies and finances well in recent years and it can withstand any turbulence that may come about,” Lindow said. “All these events were expected by us and so our rating was well placed to absorb all this.”

South African financial markets have whipsawed recently, the rand hitting a three-and-a-quarter-year low versus the dollar. The central bank has raised interest rates by 150 basis points (bps) this year, taking the repo rate to 8,5%, to stem inflation and curb a demand boom that is exacerbating the current-account deficit.

It is expected to tighten policy by another 50 bps in December.

But Lindow said the rand’s depreciation does not pose a threat as South Africa’s external debt remains small.
She said the rand looks fairly valued now—positive for exports.

“When you have these exchange-rate shifts it doesn’t have the same effect as 10 years ago when the proportion of external debt was much larger,” she said. “Its external debt indicators are very favourable by standards of emerging markets.”

She added: “I think it’s well within the parameters that we find acceptable for a country rated at this level. You expect some volatility.”

She said the economy looks able to weather the rate rises and forecast 4% growth for this year and the next. While the large current-account deficit is a worry, financing it is unlikely to be a problem, she added.

Banks, too, appear well positioned to weather the rate rises, she said, adding: “The banking sector is in good shape and [the] non-performing loan situation is much better than it was in 1998 and 2001 when the last big rate hikes occurred.”

Some of the turmoil has been due to unease over who will succeed Thabo Mbeki as the next president and what agenda he may pursue. Many worry that former deputy president Jacob Zuma, a front-runner for the role, has often espoused populist policies.

African National Congress party elections next year will almost certainly determine who will become president in 2009. Lindow said it is too early to dismiss Zuma as an ineffective candidate.

“He has indicated he is willing to adopt some more populist policies, but I don’t want to jump to the conclusion he will somehow reverse the prudent policies that have been followed so far,” she said. “He may not be doing more than what one does in a [election] campaign.”

However, investors as well as all three main rating agencies are cautious ahead of the elections. Fitch and Standard & Poor’s rate South Africa at BBB+, on par with Moody’s assessment.

“We don’t expect to see any moves downward, but we don’t expect to see a move upward unless we see some resolution of external imbalances. Uncertainty over the policies of the next president would also keep us from any upward movement,” Lindow said.—Reuters

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