Going beyond nine lives: SA might just dodge another downgrade

JOHANNESBURG — Credit rating agency Moody’s has to be among the most patient of its peers when it comes to South Africa. Despite a sharply weakening economic picture and a fresh technical recession, spokespeople from Moody’s say their stable outlook of South Africa means the chance of a change in its assessment of the country remains low. This means South Africa may still cling to its investment grade with Moody’s come October 12. This could literally be the country’s last chance to turn things around. – Gareth van Zyl

By Rene Vollgraaff and Ntando Thukwana

(Bloomberg) – South Africa’s stable ratings outlook means there’s little chance of a change in its assessment soon, Moody’s Investors Service said, adding that the country has to stabilise its debt to prevent a cut back to negative.

The ratings company’s view on Africa’s most-industrialized economy “hasn’t changed drastically” since March, when it raised the outlook, Moody’s Vice President Lucie Villa said at a conference in Johannesburg Thursday. Weak confidence will prevail until after next year’s election, she said. South Africa has a “track record of shifting fiscal-deficit targets,” Villa said.

President Cyril Ramaphosa’s rise to power since December initially boosted sentiment and the rand following Zuma’s tenure of almost nine years. That optimism faded as economic reforms weren’t implemented quickly enough and global trade wars and turmoil in other emerging markets soured sentiment. Business confidence dropped to the lowest in a year last month and the rand is close to its weakest level in two years against the dollar.

“The progress of reforms will continue to be relatively slow,” Villa said. “What we have seen is basically the government has tackled some of the things that will emerge.”

Ramaphosa will lead the ruling African National Congress in next year’s national election as the party seeks to retain the majority it has held since the end of white-minority rule in 1994. Moody’s is the only of three major ratings companies that still assesses South Africa’s debt as investment grade. It’s scheduled to publish an assessment Oct. 12.

Moody’s more than halved its forecast for South Africa’s gross domestic product growth after news that the economy fell into a recession in the second quarter.

The government is likely to miss its budget-deficit target of 3.6 percent of GDP this year and the shortfall could be close to 4 percent, Villa said. Finance Minister Nhlanhla Nene who will present the mid-term budget to lawmakers on Oct. 24, said this week the slower-than-expected economic growth means the government may collect less revenue than forecast.

The rand has lost 17 percent against the dollar this year, making it the worst-performing major currency after Brazil’s real. It gained 0.8 percent to 14.8379 per greenback at 10:25 a.m. in Johannesburg Thursday.

S. African companies will avoid Turkey-type crisis: Moody’s

By Colleen Goko

(Bloomberg) – Deep and liquid local debt capital markets have reduced the need for South African companies to borrow abroad, making them less vulnerable to a financial crisis than peers in Turkey and other emerging markets, according to Moody’s Investors Service.

Large external financing needs and a plunging currency are proving a toxic mix for Turkey’s corporate sector. But in South Africa, companies have enough access to local funding, and those that have turned to foreign debt used hedging strategies to cushion the effects of short-term currency fluctuations or buy time to adjust to long-term rand weakness, Moody’s said in a report dated 12 September.

In addition, most foreign borrowing by South African companies has been driven by offshore expansion and the debt is serviced with cash flows generated in the same currency, creating a natural hedge to currency weakness, the report said.

“Currency volatility in emerging markets has been one of the key focus areas for investors this year, particularly in terms of how it affects credit risk for companies,” Moody’s analysts lead by Dion Bate said in the report. “Despite continued rand volatility, we expect the credit quality of most South African companies we rate to remain broadly stable during the next 12 to 18 months.”

Foreign exposure

About 38 percent of South African non-financial corporate debt is denominated in foreign currencies, according to Moody’s. That compares with 56 percent for Turkey, or an amount of $336 billion, almost triple the borrowers’ assets, according to data compiled by Bloomberg. The lira’s 40 percent slump this year will make servicing those loans more burdensome, lowering capital spending and GDP growth.

Moody’s expects the rand to remain volatile over the next year, driven by how successful the government is in implementing economic reforms, as well as global factors including the US policy path, trade tensions and emerging-market turmoil. That will complicate the operating environment and investment decisions for South African companies, Moody’s said.

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