Sovereign credit ratings: Where to now?

It was difficult, on a tide of positive sentiment (“Ramaphoria”), not to anticipate – or at least hope for – a credit ratings upgrade, in view of Ramaphosa’s presidency and Gigaba’s budget.

Indeed, on March 23, ratings agency Moody’s kept South Africa’s sovereign debt at above investment grade, and changed its outlook to stable. But we’re a while away from the full impact.

Yes, the tumultuous Zuma reign has ended, and we’re seeing the start of the more economically stable Ramaphosa era, but ratings agencies’ mandates are simple: to determine a forward-looking opinion of a nation’s creditworthiness. So when discussing ‘Where to now?’ it’s critical to consider both the short- and long-term effects of political change.

In the short term

So far, what Ramaphosa and his recently reshuffled cabinet have managed to achieve is to halt the downward spiral, by improving international markets’ sentiments towards foreign direct investment in South Africa.

In the short term, we are likely to see increased levels of foreign investment into South African-run businesses. This inflow of money will give SA institutions access to the capital they need to grow, and if government can successfully and sustainably address the issues they have targeted, it is not far-fetched to dream of a credit ratings upgrade moving forward.

South Africa has now seen an outlook change to stable. But what does this mean and what effect will it have? “The confirmation of South Africa’s ratings reflects [our] view that the previous weakening of [its] institutions will gradually reverse under a more transparent and predictable policy framework,” Moody’s said. “The recovery of the country’s institutions will… gradually support a… recovery in its economy, along with a stabilisation of fiscal strength.”

Unpacking the global ratings outlook

i. Positive means that a rating may be raised.

ii. Negative means that a rating may be lowered.

iii. Stable means that a rating is not likely to change.

iv. Developing means a rating may be raised or lowered.

v. NM means not meaningful.

According to S&P, “global ratings outlook assesses the potential direction of a long-term credit rating over the intermediate term (typically six months to two years). In determining a ratings outlook, consideration is given to any changes in the economic and/or fundamental business conditions. An outlook is not necessarily a precursor of a rating change.”

Furthermore, government’s focus on tackling SOEs, the appointment of Pravin Gordhan as Minister of Public Enterprises, and the appointment of Nhlanhla Nene as Minister of Finance tick several boxes when it comes to starting to address and take action on ratings agencies’ concerns.

Now we’re stable

Accompanying a ‘stable’ outlook, we should see an improvement in the markets’ perception of our institutions, which could improve their creditworthiness and their ability to access funds at lower rates.

Investors could demonstrate greater confidence in our economy’s ability to grow and generate returns.

In the longer term, improved market sentiment and accelerated economic growth could yield greater demand for workers and reduce unemployment.

Rising earnings for South African companies could also yield an increase in the share prices of JSE-listed entities and, possibly, a decrease in the share prices of rand hedge stocks, going forward.

Further, alongside a strengthening rand we could see a reduction in inflation levels (and rate cuts), as the cost of imported goods begins to decrease.

Tips for holdcos

From an investment holding company’s perspective, there is increased opportunity to realise local and foreign investment in your assets – as the level of political risk decreases and the attractiveness of SA assets improves.

With holdcos that have public sector exposure, there is also the potential to earn greater returns off the sale of assets, as their valuations increase with reduced political risk.

Ramaphosa still has a serious mountain to climb in terms of turning the country around, rooting out high levels of systematic corruption, and reducing the mismanagement of funds through government guarantees to failed SOEs. But we have taken steps in the right direction to assure the market and ratings agencies that we have begun the hard work.

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