17 July 2009

South Africa received a major boost from rating agency Moody’s Investors Service yesterday when the agency upgraded our sovereign credit rating from Baa1 to A3. This upgrade sends a clear signal to investors that we outperformed many of our peers in the face of a massive global recession and that we also held up well in the face of a torrid investment climate that has only been matched by that of 1931.

“We’ve entered the A league,” Finance Minster Pravin Gordhan told Business Day yesterday. This foreign currency upgrade from Moody’s will help lower the costs of the country’s foreign debt and may increase the appeal of its assets to overseas investors. We must also remember that global rating agencies downgraded many developed and developing countries this year as a result of the financial crisis. Only three were upgraded: Chile, China and South Africa. Moody’s new rating for SA is one notch above comparable ratings from rival agencies Standard & Poors and Fitch. A Moody’s spokesperson said that the upgrade of SA’s foreign currency rating reflected the build-up in our foreign currency reserves and she then added that it also stemmed from “astute” debt management and the net foreign asset position of our banking system, which has weathered the global financial crisis well. “SA’s growth has been more resilient than many other countries at the same rating level…”, 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…”.

On the flipside, Moody’s lowered its local currency rating for SA from A2 to A3 citing the expected sharp rise in government debt in the medium term, as tax revenues fall. The government’s huge R787 billion infrastructure spending plan would translate into a “significant widening of the fiscal deficit and rising public debt ratios,” Moody’s said. “The government has low debt now, so it can afford to maintain a counter-cyclical fiscal stance for a time.” The Moody’s spokesperson also added that “We think the consensus is that SA is an A-rated credit – we’ve always made that statement. We think that SA is a stronger credit than a number of countries that used to be its peers.”

Our interpretation of the statements from Moody’s is that they provide a clear indication that the fiscal and monetary policies that have worked so successfully for this country will be maintained under the Zuma administration, as Finance Minister Pravin Gordhan has pledged on a number of occasions since his appointment. It also appears that Reserve Bank Governor Tito Mboweni may well serve a third term at the SARB when his current contract expires in August. If he did not continue into a third term, that would surely be claimed as a victory by the ANC’s noisy left-wing alliance partners. Surely a case of Hobson’s choice now?

The sober news in all this rating exuberance is that the largest pension fund in the USA, the California Public Employee’s Retirement System (Calpers), has sued the big three rating agencies (Standard & Poor’s, Moody’s Investors Service and Fitch Ratings) for $1 billion in losses that it says were caused by “wildly inaccurate” risk assessments. The fund contends that the agencies used methods to analyse medium term notes and commercial paper in 2006 that were “seriously flawed in conception and incompetently applied.”          

The good news is that recent technical developments on our FTSE/JSE All Share Index suggest that the bear market in local equities ended on 20 November 2008, emphasising once again the forward-looking nature of equity markets.