Moody’s South Africa Credit Ratings Released and No Junk Status
Moody’s Investors Service has confirmed South Africa’s rating as Baa2 which means that it escaped what many termed as junk status. This is good news for President Zuma and his administration. The opposition had predicted that Moody’s would downgrade South Africa to a junk status.
Moody’s explained Baa2 rating is based on its observation that South Africa’s economic growth will gradually strengthen after reaching a trough this year, as the various supply-side shocks that have suppressed economic activity since 2014 recede.
Another positive contributing factor noted by Moody’s is that the electricity supply is now more reliable, the drought is ending and the number of work days lost to strikes has shrunk significantly (a trend that planned rule changes are likely to embed further).
The third factor that Moody’s took into consideration when issuing its rating is that the inflation outlook is more subdued, which would suggest fewer interest rate rises ahead than we expected when the South African Reserve Bank saw inflation heading towards 8% by year end. Less severe tightening of monetary policy would alleviate extra pressure on South Africa’s relatively highly-indebted household sector and support growth.
Moody’s also noted that alongside the more competitive exchange rate, these improving trends are likely to strengthen growth in South Africa from the second half of this year and thereafter. “We expect growth to rise to 1.5% in 2017,”said Moody’s.
Moody’s South Africa BAA2 Rating Explained
It is worth noting that some newspaper are already misleading South Africans to believe that Moody’s rating equals junk status.
The rating is broken into two, first the (Baa) and then the number (N2).
Baa level – means that financial obligations assessed baa (sca) are judged to have medium-grade credit quality and thus subject to moderate credit risk, and as such, may possess certain speculative credit elements, when used as inputs in determining a structured finance transaction’s rating.
N2 (2) – issuers rated N-2 have an above average ability to repay short-term senior unsecured debt obligations relative to other domestic issuers. The combination thus produces Baa2 rating for South Africa.