Moody’s Says South Africa’s Debt Structure is a Ratings Strength

JOHANNESBRUG (Capital Markets in Africa) – South Africa’s longer-maturity debt and the low level of foreign-currency bonds is “more of a strength than a weakness” for the country’s credit rating, according to Moody’s Investors Service.

While 37.9% of the government’s rand-denominated debt is held offshore, it poses less risk to the sovereign because investors bear the brunt of foreign-exchange shocks, Lucie Villa, Moody’s vice president and lead sovereign analyst for South Africa, said Tuesday. That, and the longer average maturity of its debt, helps set South Africa apart from other emerging markets such as Turkey and Argentina.

“That’s certainly something that explains one of the reasons why we are at Baa3 at the moment,” Villa said at the company’s sub-Saharan Africa summit in Johannesburg.

Moody’s is the only major company to assess South Africa’s debt at investment grade after S&P Global Ratings and Fitch Ratings cut their assessments to junk in 2017. While Moody’s still has a stable outlook on its rating, which indicates a low likelihood of a change in either direction, according to Villa, a widening budget deficit after the state was forced to bail out its power utility amid weak economic growth has raised speculation of a downgrade.

The future of the nation’s credit rating is dependent on the debt trajectory, credit profile and the government’s ability to address slow economic growth. Foreign-denominated debt makes up only 10% of South Africa’s borrowing.

Moody’s warned that a “worst-case scenario” could push debt to more than 70% of gross domestic product in 2020.

The expanded 128 billion rand ($8.7 billion) three-year bailout for Eskom Holdings SOC Ltd. would add pressure on state liabilities and widen the fiscal deficit and Moody’s would be looking for the government to absorb the extra cost of capital support, Villa said. The lack of a plan for Eskom shows policy uncertainty, she said.

The ratings company maintained its economic growth forecast at 0.7% for 2019, after lowering it from 1% on Aug. 22. It sees output picking up in the second half of the year and into 2020 thanks to a “reform-oriented executive,” she said.

Finance Minister Tito Mboweni is due to present the mid-term budget in late October. While Moody’s is scheduled to publish its next assessment on Nov. 1, it doesn’t have to keep to that date.