The evolution of South Africa\u2019s credit rating<\/strong><\/p>\n South Africa attained its first formal credit assessment in 1994, and today, despite recent downgrades, the country still enjoys an investment-grade foreign currency debt rating from four ratings agencies.<\/p>\n S&P and Fitch\u2019s rating are one notch above non investment grade (BBB-),\u00a0 Moody\u2019s rates\u00a0 South Africa at Baa2, two notches above non-investment grade, while we have a rating\u00a0 of\u00a0 BBB+ from Rating and Investment (R&I), three notches above non-investment grade.<\/p>\n The initial upward trajectory of these ratings started soon after the first democratic elections in South Africa, Myburgh noted.<\/p>\n From the bottom of the investment-grade band by Moody\u2019s (Baa3) and non-investment grades from S&P and Fitch (BB), the country\u2019s sovereign rating by Moody\u2019s improved to A3 in July 2009, which, at current ratings, is similar to countries such as Ireland, Malaysia and Peru, the Sarb’s analyst said.<\/p>\n The peak in the ratings from S&P and Fitch was achieved in 2005 at BBB+, and one notch higher at A-by R&I in 2006. These ratings were respectively four (Moody\u2019s and R&I) and three notches (S&P and Fitch) above non-investment grade.<\/p>\n The improved creditworthiness of South Africa reflected a sound economic landscape, Myburgh said.<\/p>\n This included the narrowing of the current-account deficit since the mid-1990s to a small\u00a0 surplus in 2002, while economic growth improved from a small contraction in 1998 to an annualised growth rate of slightly more than 7% in the\u00a0 second quarter\u00a0 of 2005.<\/p>\n The country\u2019s ratio of government debt to gross domestic product (GDP) improved from around 50% in 1995 to almost 25% prior to the global financial crisis (GFC).<\/p>\n “The favourable economic backdrop and concomitant improved credit ratings lured\u00a0 foreign investors to South Africa\u2019s domestic financial markets. In the ten years prior to the GFC, non-residents bought a cumulative amount of almost R400 billion worth of domestic equities and just over R100 billion worth of bonds,”\u00a0Myburgh said.<\/p>\n He noted that the equity market rallied by almost 500% over the same period while the\u00a0 ten-year\u00a0 government bond yield declined by about 800 basis points to around 7% \u00a0in 2005 and 2006.<\/p>\n Key factors influencing sovereign ratings<\/strong><\/p>\n The first factor, according to the Reserve Bank, is economic strength<\/strong>, “which reflects a country\u2019s intrinsicability to honour its debt obligations and deal with various exogenous shocks”.<\/p>\n Economic growth metrics are a concern for SA, not only for authorities, but also for the rating\u00a0 agencies.<\/p>\n The Reserve Bank\u2019s GDP growth forecast for 2016 has been revised down from 0.8% to 0.6%. While a recovery is still expected in the next two years, the forecasts for both these years were revised down by 0.1 percentage points to 1.3% in 2017 and 1.7% in 2018.<\/p>\n The second aspect of ratings is institutional strength,<\/strong> “which is a key consideration for foreign investors who are considering investing in a country, though this does also affect\u00a0\u00a0 local investor confidence,” said Myburgh.<\/p>\n “South Africa generally does quite well in this regard. For example, the\u00a0 national budget\u00a0\u00a0 process is highly transparent and respected globally, and the judicial system is seen as strong and independent.”<\/p>\n The third factor is fiscal strength<\/strong>, “which is primarily an assessment of the overall health\u00a0 of government finances. Governments which have a short debt maturity profile face significant refinancing risk,” the bank said.<\/p>\n In South Africa\u2019s case, the weighted term-to-maturity of total government debt is 12.7\u00a0 years,\u00a0 and National Treasury actively manages various risks associated with its debt portfolio, Myburgh said.<\/p>\n South Africa\u2019s government gross debt to GDP ratio is expected to remain between 50 and 51% over the medium term. And while in line with the emerging-market average, it is better than Brazil (76-81%) and India (around 66%).<\/p>\n “It is also noteworthy that only 10% of South African government debt is denominated in foreign currency, reducing the exposure to exchange rate shocks. In addition, short-term\u00a0 debt is sufficiently covered by reserves,” Myburgh said.<\/p>\n Susceptibility to event risk is also important for rating agencies. “This criterion assesses\u00a0 whether sudden events or risks could materially increase the probability of default,” the analyst said.<\/p>\n South Africa’s financial markets are also highly advanced, have good liquidity and a\u00a0 strong domestic investor base. “However, the country\u2019s dependence on foreign portfolio financing to fund the current-account deficit makes it somewhat vulnerable to exogenous financial sector shocks.”<\/p>\n “The recent pronouncements by Moody’s and S&P have given us a window of opportunity to prevent more rating downgrades. However, the negative outlook indicates that we must remain focused and take appropriate and decisive action,” Myburgh said.<\/p>\n Rand back below R15 vs the dollar as ratings agency says no recession for SA<\/strong><\/a><\/p>\n This is how close South Africa came to a recession in 2015<\/strong><\/a><\/p>\n![\"Credit](\"http:\/\/businesstech.co.za\/news\/wp-content\/uploads\/2016\/05\/Credit-rating-projection-640x329.png\")
<\/a><\/p>\nMore on credit ratings<\/h3>\n