A recovery of the country’s institutions under new leadership, improved growth prospects, and clear and stable fiscal plans are the key reasons behind rating agency Moody’s decision to not junk South Africa’s sovereign debt and leave it unchanged.
Moody’s kept the country’s local and foreign debt at Baa3, which is investment grade and just one notch above junk. It revised its outlook from negative to stable.
“The confirmation of South Africa’s ratings reflects Moody’s view that the previous weakening of South Africa’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,” said the institution in a statement.
Moody’s is the last of the three major credit rating agencies to still hold South Africa’s debt at investment grade. In November 2017 the agency decided to hold off on making a rating decision on the country opting to wait for the outcome of the ANC elective conference in December and the 2018 Budget.
Since then the darling of investors Cyril Ramaphosa ascended to the position of ANC president in December and just two months later, in February, he was elected to the top job after former president Jacob Zuma resigned.
Under the “new dawn” brought on by President Ramaphosa there have been notable changes to key leadership positions at Eskom, South African Airways (SAA) and the South African Revenue Service (Sars). Ramaphosa also had a cabinet reshuffle where he appointed Nhlanhla Nene as finance minister and Pravin Gordhan was appointed minister of public enterprises.
Moody’s said it was these changes which signalled a halt in the the gradual erosion of the strength of South Africa’s institutions.
“While it is still very early days, the speed with which the President has moved to replace the leadership in key institutions, including the ministries of finance, mineral resources, and public enterprises and most recently at Sars, illustrates the resolve to address the problems of the recent past and to set the state, society and the economy on a new and positive path,” said Moody’s.
It’s reported that the decision to move the country to junk would have prompted R100-billion in capital outflows from South Africa.
The downgrade of the country’s local debt automatically removes the country from key global bond indices such as the Citigroup World Bond Index (WGBI). To be a member of the WGBI either Moody’s or S&P Global should rate your country’s local currency rating as investment grade.
Credit ratings agencies S&P Global and Fitch already have South Africa’s foreign and local currency government debt at sub-investment grade or junk status.
The agency said that the absence of any clear policy direction in the Medium-Term Budget Policy Statement (MTBPS) given in October 2017, was a key driver of the recent review of South Africa’s credit rating.
But this turned around after what was viewed as a more decisive and tough Budget delivered by former finance minister Malusi Gigaba in February indicating that the country was headed towards fiscal sustainability. Gigaba announced a one percentage point value-added tax (VAT) increase, the first since 1993, and cuts to state expenditure.
“Overall, Moody’s now expects the government’s debt burden to stabilise at around 55% of GDP over the 2018-2020 period.”
These changes are expected to come parallel with increased economic growth. South Africa’s economy grew more than expected in 2017 with GDP (gross domestic product) coming in at 1.3% higher then the 1% predicted by the treasury in February 2017.
Since Ramaphosa’s election there’s also been a marked improvement in business and consumer confidence and improved strengthening of the rand. Moody’s said if these markers are sustained they could offer the “prospect of rising levels of investment in South Africa’s economy and enhanced medium-term growth”.
Treasury has welcomed Moody’s decision to affirm South Africa’s local and foreign currency at investment grade saying it demonstrates that when South Africans work together they can achieve remarkable outcomes.
“Collaboration between government, business, labour, and civil society is also yielding necessary interventions to positioning South Africa as an attractive investment destination while also creating an enabling policy for inclusive economic growth,” said Treasury.
Now all eyes are on the Reserve Bank to see if it will cut interest rates next week following low inflation numbers. StatsSA announced on Tuesday that Consumer Price inflation (CPI) decelerated to 4%, the lowest inflation level since March 2015.