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TIMELINE: SA's credit rating journey since 1994

Nov 24 2019 13:50
Lameez Omarjee

Friday night saw S&P Global Ratings changing its outlook on South Africa's sub-investment BB+ rating from stable to negative. It warned of a lower credit rating if there were further fiscal deterioration, Fin24 reported. The agency cited sluggish GDP growth, rising fiscal deficits and an increasing burden of debt. 

It downgraded the country's credit rating to junk in November 2017.

Moody's is the only remaining major ratings agency to still have SA at investment grade, albeit one notch above junk status at Baa3, with a negative outlook.

A negative outlook assigned to the rating means SA has up to two years to repair government finances to avoid a complete downgrade to junk, according to Investec chief economist Annabel Bishop.

If SA is downgraded to junk, the country would fall out of the major Citi World Government Bond Index, Bishop said in an emailed response to questions from Fin24. "This would trigger a selloff of SA bonds and equities, with a negative impact on the rand and Treasury independent economists have warned," she added.

While SA tiptoes to full-on junk status, it is worth noting that the credit rating has been ranked as high as A. This means ratings agencies have previously believed in a strong payment capacity of sovereign debt.

SA 'can make it again'

"South Africa has seen its credit ratings fall since 2009 and is now on the cusp of becoming a pure sub-investment grade rated country from the three key agencies following Moody’s placing SA's last investment grade rating on a negative outlook.  

"However, South Africa has made its way up the credit rating path before to A grade, even an A+, and it can make it back again," Bishop said.

Fin24 takes a look at SA's credit rating journey since 1994, based on information collected from the SA Reserve Bank, previous reviews by ratings agencies and insights from economists.

Mandela years 1994 - 1999

According to the SARB, both Standard & Poor's and Fitch had SA's foreign currency rating at sub-investment grade in 1995, when Nelson Mandela was president.

But in subsequent years the rating for local currency debt slowly climbed the ranks to investment grade status after 1995.

Mbeki years 1999 - 2008

As of February 25, 2000, all ratings agencies had the foreign currency debt rated at investment grade. At this point S&P and Fitch had the foreign currency debt at BBB- and Moody's rating was at Baa3.

During former president Thabo Mbeki's tenure, further upgrades followed. This was supported by annual growth in GDP in excess of 3% from 2001, according to the SARB.

Bishop echoed views that the upwards trajectory in the credit rating was driven by "strong economic growth". Fiscal consolidation and good governance of both state-owned enterprises and general government also had a positive impact on the rating, she added. 

"In the early 2000s government started the upgrading of SA's infrastructure while following fiscal consolidation.

"Through improved fiscal management, money was available to spend on infrastructure, with good management typically yielding quality infrastructure delivered on time, within budget and which supported private corporate sector expansion," Bishop said.

Fixed investment growth propelled economic growth to above 3% and unemployment to below 22%.

"Credit ratings rose, with an A+ from Moody's," she explained.

Bishop said there was a virtuous cycle that helped boost business confidence and economic activity in the 2000s. Economic policy focused on expanding the ability of the economy to produce, for example through improving the ease of doing business and ensuring sufficient infrastructure to support faster growth, Bishop said.

"The expansion of the productive capacity of the economy allowed it to respond to increased global demand for SA’s exports as global economic growth accelerated during the 2000s, and commodity prices lifted.

"This is a key point as metal prices rose by over 50% and SA was largely able to take advantage of this. Indeed, most of the 2000s saw the highest consistent growth rate South Africa had experienced in thirty-five years. This all ended in 2009," Bishop said.

SA's credit rating history up until 2017.

SA's credit rating journey from 1995 to 2017, as shown in the SARB's quarterly bulletin for 2017.

Zuma years 2009 - 2017

Shortly after former president Jacob Zuma took the reins, SA maintained its investment grade status, for both foreign and local currency debt. 

At this point S&P and Fitch had SA's foreign currency ranked at BBB+ and Moody's had the foreign currency ranked at A3. But this did not last long. 

In September 2012, the first set of downgrades were experienced. All three rating agencies downgraded the foreign currency rating, according to the SARB. Moody's dropped the rating from A3 - which reflected a string capacity to pay debt - to Baa1, which reflected an adequate payment capacity. Both S&P and Fitch dropped their ratings from BBB+ to BBB. All these ratings were still ranked at investment grade.

Similarly, local foreign currency debt was also downgraded. Moody's dropped its rating from A3 to Baa1 in 2011, while in 2012, S&P dropped ratings from A to A- and Fitch dropped ratings from A to BBB+.

According to the SARB, when a ratings agency changes a country's outlook to negative, it waits 18 months before issuing downgrade of the rating, to ensure concerns raised have been adequately addressed. However, any unusual events could speed up the process of a downgrade.

For example on December 4, 2015, S&P changed the long-term foreign currency rating outlook from stable to negative and downgraded the rating within the 18-month period by April 3, 2017.

Cabinet reshuffle April 2017

In April 2017, Zuma reshuffled his Cabinet, and most notably removed Finance Minister Pravin Gordhan and Deputy Finance Minister Mcebisi Jonas from their posts.

Both S&P and Fitch, which had SA's foreign currency at the last rung of investment grade at BBB-, downgraded the foreign currency rating to junk status or BB+ in the days that followed.

Moody's was the only ratings agency which kept the rating at investment grade at Baa2, but placed the country on review for downgrade, Fin24 reported.

Ratings agencies had raised concerns of the impact of the Cabinet reshuffle on policy direction and by extension the implications for growth and public debt.

"These downgrades have taken the country back to its credit rating status that prevailed during the late 1990s," the SARB said.

Bishop likened the exodus of investors during Zuma's reign to that of the years preceding the collapse of the apartheid system.

"From 1982 to 1993 productive capacity increased by only 1.5% on average, growth slipped to 0.8% as many investors, both foreign and domestic, either developed a wait and see approach, or disinvested in response to the domestic political situation.

"This occurred again over most of this decade under the Zuma government due to the high level of political volatility and uncertainty, the substantial deterioration in government finances (since 2009), the threat to private sector property rights and numerous instances of poor governance in a bloated state riddled with state capture," Bishop said.

"The last couple of years have seen the Ramaphosa government seek to address many of these issues, but progress is understandably slow due to the enormity of change that is needed," she added.

Zuma vs. Ramaphosa June 2017 – February 2018

By June 2017, Moody's downgraded the foreign currency rating from Baa2 to Baa3, the last rung of investment grade. At the time Moody's flagged the weakening of the institutional framework, reduced growth prospects due to policy uncertainty and slower progress with structural reforms, Fin24 reported.

On November 24, 2017, S&P lowered both the ratings of foreign currency and local currency debt. Foreign currency debt was lowered from BB to BB+, the second rung of sub-investment grade. The local currency rating was lowered from investment grade at BBB- to junk status at BB+.

At the time, S&P said the downgrade reflected expectations of a further deterioration of the economic outlook and public finances, Fin24 reported.

This happened ahead of the ruling party ANC's national elective conference, which saw a two-headed race between Nkosazana Dlamini-Zuma and Ramaphosa.

Ramaphosa had a close-call victory in the ruling party, and subsequently took over leadership of the country when Zuma stepped down in February 2018.

The year of Ramaphosa 2018 - 2019

Shortly after becoming president, Ramaphosa had his first Cabinet reshuffle and brought back Nhlanhla Nene as head of Treasury.

The president also announced several commissions of inquiry to deal with corruption in various state entities such as SARS and the PIC. Revelations in testimony by Nene at the State Capture inquiry that he had met with the Gupta family while he was still deputy minister of finance, brought his credibility as a leader into question. Nene resigned which sparked fears for SA's ratings.

But Ramaphosa brought back former Reserve Bank Governor Tito Mboweni to lead Treasury and to present the medium-term budget policy statement just days after Nene left Treasury.  

By the end of the year, all three ratings agencies kept the ratings unchanged. S&P kept the local currency debt at BB+, and foreign currency rating at BB. Similarly, Fitch kept the foreign currency rating at BB+ and local currency at BB+. Moody's kept the foreign currency and local currency debt rating at Baa3.

Mboweni has since presented both a national budget – in which R69bn in funding was announced for Eskom over the next three years – and a medium-term budget policy statement highlighting that an additional R59bn would be made available to Eskom through a special appropriations bill, recently passed by Parliament.

Moody's downgraded the outlook to negative, on the back of the medium-term budget policy announcement.

The country is currently in a process of reforming governance at key state-owned enterprises and state agencies, Bishop noted.

"However, in order to foster fast, sustainable economic growth the regulatory burden needs to be substantially eroded, with over 25% of red tape speedily eliminated and the productivity of the civil service greatly increased dramatically in order to improve the ease of doing business in SA," she said.

Bishop is of the view that state intervention and control of the economy must be reduced, in favour of free market policies which could increase economic freedom and by extension GDP growth, employment, confidence and investment.

"SA needs to be materially more efficient and effective in public expenditure, with a strong focus on cost saving - and the eradication of corruption," she added.

Slow pace of downgrades

Kim Silberman, fixed income and currency analyst at RMB Global Markets Research, commented that South Africa's past downgrades have been slow. She explained this because the country's debt is dominated in local currency, unlike other emerging market peers which have a higher exposure to foreign currency funding. "Our economy isn't faced with the kind of crises Turkey or Brazil are faced with when there is a risk-off environment," she said.

The recent downgrades have mainly been a response to local factors – such as the unsustainable fiscal environment and low growth environment – while other countries may be downgraded because they can't pay offshore debt, she explained.

"South Africa is different. We are not prone to default [on debt payments]. We have a huge asset management community which can fund South Africa with local currency. We have got a fully funded state pension fund. We are very well protected against any kind of imminent default," Silberman said.

Silberman added that an upgrade to the credit rating is possible if the country can improve growth – which is dependent on the country's ability to secure energy – and stabilising debt by cutting expenditure on public sector wages, an option Mboweni has thrown down the gauntlet in the recent medium-term budget policy statement.

In the meantime, Moody's will be keeping watch of the National Budget in February 2020, to see if government can show it has a credible plan to stabilise debt over the medium term, through reining in expenditure, improving tax compliance and lifting potential economic growth, Fin24 previously reported. The ratings agency warned it would downgrade the credit rating if the country's economic and fiscal strength continue to weaken.

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