Moodys considers further upgrade for SA :: Namibia Internet Gateway cc ::

Articles: Moodys considers further upgrade for SA

Posted by admin on Wednesday, April 05, 2006 - 08:18 AM

INTERNATIONAL rating agency Moodys is considering a further upgrade of SA’s credit rating within the next year, but it will be keeping a careful watch on the deficit on the current account of SA’s balance of payments, says the agency’s lead analyst for SA.
Hilary Joffe

Moodys upgraded SA’s foreign currency rating from Baa2 to Baa1 last January, bringing us within one notch of the A grade. Ratings are an indication of how reliably a country (or company) will service its debt. A better foreign currency rating helps to make it cheaper for the South African government to borrow abroad in dollars or euros, and this ultimately cuts the cost of borrowing for South African companies as well. Moodys has tended to lead the other ratings agencies in upgrading SA. The ratings outlook is “stable” at present. If the agency were to put SA on outlook “positive” that would indicate it was looking to upgrade within a year to 18 months. Kristin Lindow, Moodys’ lead analyst for SA, said yesterday she could see herself proposing a change in SA’s outlook to the Moodys ratings committee within the next year or so. SA needed to do “more of the same”. Its fiscal management was exemplary, as were monetary policy and the exchange-rate framework, she said. A key factor that prompted the Moodys upgrade last year was the improvement in SA’s international reserves. The external vulnerability ratio that Moodys watches, which measures how well a country’s foreign exchange reserves cover its maturing long- and short-term foreign debt, fell to 62% by the end of last year from more than 200% at the end of 2003. Lindow said this put SA comfortably in the range of investment-grade countries. A further improvement in the ratio would help, but it was already “okay”, especially as the stock of debt was declining. However, she said the ratings committee would worry about the current account deficit and whether it would get substantially larger. The analyst said she was not too concerned because the deficit reflected a catchup of investment spending. Yet she told clients in Johannesburg yesterday that for a ratings upgrade, Moodys would have to see “clear signs that the trade and current account deficits were topping out”. The agency would want evidence that SA’s growth potential had accelerated beyond 5% while being able to finance the current account deficit. It was looking for clarity on economic policy continuity through the next administration, she said. Lindow has previously raised questions about how sustainable the balance of payments capital account inflows that finance the current account deficit are. She said that even though there were still large speculative and unexplained flows “I am getting to the point where I think SA’s resilience has been proved time and again”. Though Moodys foreign currency on SA rating is Baa1, our local currency rating is two notches above that at A2, indicating Moodys has a very favourable view of government’s domestic creditworthiness.

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