The announcement late last night by global credit rating agency Moody’s Investor Services affirming South Africa’s long-term investment grade and upgrading its outlook from negative to stable is a vote of confidence in the progress we have made as a country since late last year.
After placing South Africa on a 90-day review for a downgrade last November, Moody’s kept government’s long-term issuer status unchanged at Baa3, saying “the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework”. Long-term local currency bond and bank deposit ceilings and both short and long-term foreign currency bond ceilings remain unchanged.
The positive news follows a post-Budget investor roadshow to the UK and US last week, where a delegation of government, business and labour leaders met with the three major global rating agencies, including Moody’s. In its Friday announcement, Moody’s noted that “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”.
Nedbank Group Chief Executive Mike Brown, who is currently on investor roadshows in the UK and US following the release of the Group’s 2017 financial results, said sentiment among the international investor community has shifted favourably in the last month. “The positive endorsement of recent changes in the institutional strength, growth outlook and fiscal outlook for our country should rightly be seen as a feather in the cap for the start of the Cyril Ramaphosa presidency.”
Brown said Moody’s move to a stable rating for SA’s sovereign debt would contribute to a lower cost of debt for the government, freeing up resources to be spent on development priorities rather than interest. “However, it should not lead to complacency. It remains critical that we revive the economy using growth enhancing policies that attract investment to deliver the economic growth and job creation needed to uplift people from poverty and address inequality.”
In its announcement, Moody’s noted several improvements in the outlook for South Africa’s credit position. These include the appointment of a new cabinet by President Cyril Ramaphosa, including highly respected leaders in the key ministries of both finance and public enterprises. Moody’s noted the improvement in economic performance including the fourth quarter GDP growth of 3,1%, and sharply improved consumer and business confidence. The improved outlook for South Africa’s gross debt stock, which will reach a peak of 56,2% of GDP in 2021/22 before declining, as opposed to the continuous upward trend that was implied in the October 2017 Medium Term Budget Policy Statement, also bodes well for South Africa. Expectations of improved revenue collection also presents a convincing view that South Africa’s financial outlook is sustainable.
Moody’s is the only one of the three major global ratings agencies that has SA’s foreign currency and rand-denominated debt at investment grade. Standard & Poor’s (S&P) and
Fitch both downgraded South Africa to junk status in November last year. The decisions by S&P and Fitch led to a premium on the cost of raising debt by the South African government.
However, the Moody’s rating at above investment grade means that South Africa’s bonds will maintain their place in several international bond indices. Had Moody’s downgraded, there would have been far greater pressure on South African yields as a large amount of capital could have been forced to exit South African bonds.
Brown emphasised that despite this positive news, crucial policy steps were still needed to shift the economy onto a sustainably higher growth path, including finalising amendments to the Mineral and Petroleum Resources Development Act and the mining charter as well as clarifying the land reform expropriation without compensation process which is a concern for investors. Further interventions are also needed to end uncertainty over spectrum allocation, digital television migration, immigration regulations amongst other issues.
The financial position of state-owned enterprises, particularly Eskom, needs to be stabilised as the current levels of debt at the electricity utility are not sustainable. Eskom, in the context of our country, is simply “too big to fail”. A long-term energy policy must be developed to ensure energy security, energy affordability, cleaner energy and Eskom’s stability as a public institution. “The right policy steps will create an environment in which companies can grow and generate jobs,” said Brown.
However, as President Ramaphosa has emphasised, South Africa needs all social partners to work together. Nedbank is a member of the CEO Initiative, which works with government and organised labour to address specific challenges facing the country. The CEO Initiative has established the Youth Employment Scheme (YES) to drive youth employment creation and the SA SME Fund, with R1,4 billion in funding commitments from corporate SA.
“It is through such initiatives that we can contribute to helping South Africa realise its potential to improve the lives of all her citizens,” concluded Brown. “The Moody’s decision is a welcome vote of encouragement that will help build positive momentum. We must all contribute to that momentum and to building a South Africa we are all proud of.”