South Africa Dodges Third Junk Rating; Moody's Lifts Outlook

(Bloomberg) -- South Africa escaped a third junk rating as Moody’s Investors Service maintained its assessment of the nation’s debt unchanged, citing more transparent and predictable policies under President Cyril Ramaphosa.

The African nation’s outlook was revised to stable from negative. The decision will boost sentiment and probably bolster the rand, which rallied after Ramaphosa took over as leader of the ruling African National Congress in December and became president last month. With the local-currency rating remaining investment grade, the nation avoids being excluded from global benchmark indexes that could have led to outflows of as much as much as 100 billion rand ($8.4 billion).

Moody’s maintained the nation’s local- and foreign-currency assessments at Baa3, the lowest investment-grade level, the ratings company said in a statement on Friday. The affirmation keeps South Africa on the same level as that of Indonesia and Romania.

"The recent change in political leadership appears to have halted the gradual erosion of the strength of South Africa’s institutions," Moody’s analysts Zuzana Brixiova and Marie Diron wrote in the statement.

Weak Growth

While economic growth in Africa’s most-industrialized economy exceeded the government’s forecast last year, it’s been below 2 percent since 2014. Finance Minister Nhlanhla Nene, who was reappointed last month, said the National Treasury may raise its projected 1.5 percent growth forecast for 2018.

“Our economy shouldn’t be performing at this level, we should be performing much higher than 1.5 percent,” Dondo Mogajane, director-general of National Treasury said in an interview. “If you add on the other things that we’ve spoken about, the confidence, telecoms, the barriers to entry issues, transport and focus on agriculture and investment in tourism, clearly all of those combined should give you a decent number that you can add on to the base of 1.5 percent.”

The National Treasury also said it’s working to provide policy certainty on issues such as mining legislation.

The nation’s banking association says stronger fiscal discipline and good governance is required to eliminate wasteful and unauthorized expenditure and to place state-owned enterprises on a sustainable footing, in order to regain its investment rating from all three major credit rating companies.

“This places us in purgatory, so we aren’t going to heaven and we aren’t going to hell either,” Thabi Leoka, an independent economist in Johannesburg, said by phone before the announcement. “We still have very low growth over the next two years and we still have a revenue shortfall, while already surpassing the spending ceiling and we need to fix all of those, quite significantly, before we we can actually be in a comfortable position regarding our rating.”

Fitch Ratings Ltd. affirmed the country’s debt scores at its highest non-investment grade in November with a stable outlook while S&P Global Ratings lowered the nation’s rand debt to junk and cut the foreign-currency assessment to two levels below investment grade. S&P is scheduled to make a ratings announcement on May 25.

The rand led gains in emerging-market currencies Monday, climbing 0.6 percent to 11.6745 per U.S. dollar by 07:43 a.m. in Johannesburg and extending a 2 percent advance last week. Yields on the nation’s local-currency government bonds due December 2026 were steady at 7.9 percent, close to their best levels since 2015.

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