South Africa is not ‘junk’, says new rating agency

 ·26 Sep 2022

A new credit rating agency focused on emerging markets says South Africa’s economy is not ‘junk’, giving it an investment grade rating with a stable outlook.

The new Gauteng-based agency, Sovereign Africa Ratings (SAR), launched its inaugural review of the country this week, aiming to provide an additional opinion on South Africa’s creditworthiness compared to the ‘big three’ agencies – Fitch Ratings, S&P Global and Moody’s Investors Service – which make up 95% of the sector.

Providing rationale for SAR’s voice in the field, chief executive Sfiso Falala told the SABC that different African economies are at various levels of industrialisation or digitisation – thus the ‘one-size-fits-all’ evaluation used by global agencies cannot be applied.

“It is our obligation as credit rating agencies to note that we cannot, as we did in the late 1800s or 1900s, say that we serve the interest only of the issuers because we are affecting business, we are affecting sovereigns, we are affecting individuals. Therefore the broader accountability of sovereigns needs to be explored,” said Falala.

Speaking to ENCA, Zwelibanzi Maziya, SAR chief operating officer, said that the ‘big three’ agencies have all given South Africa similar ratings.

“African leaders have shown dissatisfaction with the methodologies used by legacy rating agencies. The SAR’s methodology of rating is unique in that it emphasises additional metrics. Our methodology focuses on all traditional rates used by other agencies, but in addition, the structural framework of a country and its resource endowment,” said Maziya.

As a result, SAR granted South Africa a long-term rating of BBB and B+ in the short term.

“So far, we rated South Africa as triple B in the long term – meaning it’s not junk. It has been resilient even post-Covid; banks are holding adequate capital. We also increased tax revenue over the past two years.”

“We feel that South Africa is definitely still investment grade.”

This goes against what figurehead agencies have said in the past, with Moody’s Investors Service recently placing South Africa two steps below investment grade while S&P Global, alongside Fitch, ranked the country three steps below, reported Bloomberg.

SAR said it took into account South Africa’s performance in terms of both macroeconomic and non-economic fundamentals, as well as the direction and assessment of the South African economy in terms of key indicators and variables such as:

  • Natural resource endowments;
  • Climate change risks;
  • Social and socio-economic fundamentals;
  • Economic growth;
  • Government debt (domestic and foreign currency denominated);
  • Gross loan debt and contingent liability profile;
  • Budgetary performance and adequacy of fiscal flexibility;
  • External performance;
  • Monetary and fiscal policy stance;
  • Liquidity position and institutional; and
  • Governance framework.

“The ratings are also supported by the country’s reconstruction and recovery plan, which aims to address some of the country’s challenges such as high unemployment, poverty and income inequality, energy and water crises, as well as deteriorating infrastructure and logistics networks,” it said.

In terms of the government’s plans, the following priority interventions will be made:

  • Aggressive infrastructure investment.
  • Employment-orientated strategic localization, reindustrialisation, and export promotion.
  • Energy security.
  • Support for tourism recovery and growth.
  • Green economy interventions.
  • Mass public employment interventions.
  • Strengthening food security; and
  • Macroeconomic interventions.

It noted that the country still faces challenges, namely rising debt and rising contingent liabilities such as servicing state-owned entities.

According to the COO, the National Treasury has been made aware of the rating, and the agency will continue to engage with it to further solicit a credit rating.

SAR aims to investigate further other emerging markets in South America and Asia.

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