17 July 2009
editorial
Johannesburg — WHEN international credit rating agencies rate a country's creditworthiness, they give it two rankings: one, in foreign currency, applies to any debt the country issues on international markets, in dollars, euro or yen. The other, the local currency rating, applies to debt issued on the domestic market in the country's own currency -- in our case in rand.
Most of the time, the two ratings would be the same -- the assumption being that what matters to international investors in the country's bonds is much the same as what matters to local investors. But SA has long been unusual in that its ratings have been different: essentially, our ability to repay debt in dollars, say, was considered rather less certain than our ability to repay it in rand.
The problem was SA's balance sheet with the rest of the world, particularly our current account deficit and relatively low foreign exchange reserves, all of which made our currency vulnerable.
For that reason Moody's (and rivals Fitch and Standard & Poor's) have in recent years given SA a foreign currency rating that was at least one notch below its local currency rating. On the Moody's scale, the local rating, until yesterday, was already comfortably into A territory at A2, because SA's macroeconomic policy and public debt position were seen as pretty good. But the foreign currency rating was still only in the B band, at Baa 1.
Yesterday Moody's finally "unified" the two ratings at A3 -- which meant it upped the foreign by one notch but took the local rating down by one notch.
It was in many ways an important moment for SA, and one worth celebrating. At last, and in the midst of a recession too, we have the "A" grade international debt rating we have long coveted. That puts us in line with a country such as Malaysia and just one notch short of some fairly high class A2 rated countries such as Korea and Poland. And it should enable us to borrow on international markets at more attractive rates.
But that does not mean that it's time to pop the champagne corks. The warning noises Moody's made yesterday about the outlook for SA's fiscal position and its public debt were loud.
The change, Moody's sovereign analyst Kristin Lindow assures us, was a "net negative": the agency's assessment of the fundamental creditworthiness of any government is reflected in its local, not foreign currency rating.
The message, in other words, is that we have a problem. Tax revenue is way down, the fiscal deficit is way up, and the pressure to spend more, on infrastructure and on social grants, is strong. We can afford a bigger deficit and higher public debt for a year or two. But Moody's worry is that the deficit will continue rise and public debt ratios worsen even in the medium term, once the economy starts to recover. The pressure to spend, on infrastructure and on social transfers, is strong. The risk Moody's sees is that the Zuma administration may not be able to curb that spending pressure. Hence the downgrade. And though it leaves SA still well rated, the warning is clear.
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