Moody’s ups SA’s credit rating


Moody’s Investors Services has upgraded South Africa’s sovereign credit to the coveted A category in a step Business Day newspaper says shows the country is outperforming many of its peers in the face of the global recession.

Moody`s decision to upgrade its foreign currency rating for SA to A3 from Baa1 will help lower the costs of the country`s foreign debt and may increase the appeal of its assets to overseas investors, Business Day newspaper adds on its front page this morning.

Government bonds and the rand firmed in response to the decision, seen as a spectacular thumbs-up for SA in the midst of its first recession in 17 years and with its budget deficit set to soar.

“We`ve entered the A league,” Finance Minister Pravin Gordhan told Business Day. “The key thing here is foreign perceptions for SA — they impact on the cost of borrowing overseas. In perception terms and in gross terms it`s a positive move forward.”

Global rating agencies downgraded many developed and developing countries this year with the financial crisis. Only three were upgraded: Chile, China and SA.

Moody`s foreign credit rating for SA is now a notch above comparable assessments from rival rating agencies Standard & Poor`s and Fitch, which have also placed a negative outlook on their ratings.

But historically, Moody`s has always been first to upgrade SA, since it became eligible for the process in 1994. Other rating agencies have eventually followed suit.

“We are certainly hoping that the approach which Moody`s takes, which looks at long-term policy, will be taken into account by other rating agencies,” Gordhan said.

“Moody`s has hit the nail on the head in the right kind of way.”

Moody`s also lowered its local currency rating for SA, which it sees as more important, to A3 from A2. But investors attach more weight to foreign currency ratings, which determine the cost of a country`s borrowing in global markets.

“We are now rubbing shoulders with countries like China and Malaysia, which are big drawers of foreign direct investment (FDI),” said Brait economist Colen Garrow.

“It means we should get noticed more when it comes to FDI.”

Moody`s senior vice-president Kristin Lindow said the upgrade of SA`s foreign currency rating reflected the build-up in its foreign currency reserves, which buffer the country from external shocks.

She said it also stemmed from “astute” debt management and the net foreign asset position of its banking system, which has weathered the global financial crisis well.

“SA`s growth has been more resilient to the global crisis than many other countries at the same rating level with a contraction estimated for 2009 of only 2% or so,” she said.

“The banking system also felt little of the direct impact of the global financial crisis due to a prudent regulatory environment and low levels of leverage, although lending has nonetheless tightened perceptively due to rising non-performing loan portfolios.”

Credit growth slowed sharply in SA in response to tighter lending rules and contraction in the domestic economy. Government bonds rallied after the news of SA`s sovereign upgrade, with yields on the benchmark R157 bond due in 2015 falling by about 10 basis points to 8,58% at one stage.

“It`s quite a positive statement, and surprising as it comes at a time when many countries are taking strain,” said Citigroup sub-Saharan Africa strategist Leon Myburgh.

Gordhan said SA would do no more foreign borrowing this year after issuing a 1,5bn 10-year bond in May, which was heavily oversubscribed. He said there was no need to step up local bond issuance in the near term, despite an expected shortfall in government tax revenues.

“Nothing dramatic is going to happen. The revenue picture is stable and holding up at this stage, running R19bn under target.”

Revenues may not undershoot this year by as much as the R40bn-R60bn, which he warned earlier was possible.