SOUTH AFRICA RECEIVES AN A-CATEGORY CURRENCY RATING FROM

UNCLAS PRETORIA 001463 DEPT FOR AF/S; AF/EPS; EB/TPP USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND TREASURY FOR DAN PETERS DEPT PASS USTR FOR WILLIAM JACKSON E.O. 12958: N/A TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF SUBJECT: SOUTH AFRICA RECEIVES AN A-CATEGORY CURRENCY RATING FROM MOODY'S 1.(U) Summary. Moody's raised South Africa's foreign currency rating from Baa1 to A3, while simultaneously lowering its local currency rating from A2 to A3, on July 16, 2009. South Africa's improved foreign currency rating reflected a build-up in official foreign currency reserves and a net foreign asset position in the banking system. Moody's decision to downgrade the local currency rating reflected concern about the deterioration in the South African government's (SAG's) fiscal position. Most analysts welcomed Moody's decision. End Summary. -------------- Moody's Decision -------------- ¶2. (U) Moody's raised South Africa's foreign currency rating from Baa1 to A3, while simultaneously lowering its local currency rating from A2 to A3, on July 16, 2009. According to Moody's, this was largely a technical action to align the local and foreign currency ratings (at A3) so that "they are now consistent with the way Moody's rates the governments of countries that are well integrated into the global economy, making no differentiation in a government's creditworthiness on the basis of currency denomination." -------------- Foreign Currency Rating Upgraded -------------- 3 (U) According to press reports, Moody's senior Vice-President Kristin Lindow said the upgrade of South Africa's foreign currency rating reflected a build-up in official foreign currency reserves and a net foreign asset position in the banking system, which has been achieved in spite of a large current account deficit in recent years. [Note: According to South African Reserve Bank (SARB) data, South Africa's reserves increased to $35.8 billion in May 2009 from $27.8 billion two year earlier. End Note.] Lindow also praised South Africa's sound government debt management, which relies on deep domestic capital markets and minimizes short term external liabilities. -------------- Local Currency Rating Downgraded -------------- ¶4. (U) Moody's highlighted that the decision to downgrade the local currency rating a notch rather than upgrading the foreign currency two notches reflected concern about the deterioration in the SAG's fiscal position. Over the short term, tax revenue will be lower due to the current recession, while expenditure will increase over the medium term because of increased infrastructure and social spending. Moody's cautioned that even though debt levels were currently low, the economy's growth potential is likely to shrink in a less supportive global environment, implying that "reversing the upward debt trajectory will prove difficult." ¶5. (U) According to press reports, Lindow said the two rating adjustments were, on balance, a "mild negative," as Moody's views the local currency rating as more important. However, she told a journalist, "We think the consensus is that South Africa is an A-rated credit. We think that South Africa is a stronger credit than a number of countries which used to be its peers." -------------- Local Reaction -------------- ¶6. (U) Most analysts welcomed Moody's decision to upgrade South Africa's foreign currency rating, seen as a spectacular thumbs-up for South Africa in the midst of its first recession in 18 years. "We've entered the A league," Finance Minister Pravin Gordhan boasted to journalists. Government bonds rallied after the news of South Africa's sovereign upgrade, with the yield on the benchmark R157 bond due in 2015 falling by about 10 basis points to 8.58% at one stage. Likewise, the rand strengthened to R8.11/1$, after it had weakened to R8.30/1$ earlier in the week. Standard Bank said, "The upgrade is a huge vote of confidence in the management of South Africa, which, along with reduced external vulnerabilities, now places the economy on a firmer footing to attract foreign direct investment. ¶7. (U) According to press reports, Gordhan said South Africa will not tap the foreign market again this year, despite speculation that the increase in the deficit projection could lead to another Eurobond issue. Treasury Director General Lesetja Kganyago echoed the minister at a press conference, adding that, although government has the fiscal space to borrow, the Moody's rating is "not a license to borrow limitlessly." -------------- Comment -------------- ¶8. (U) Moody's decision to give South Africa an A-category currency rating is a vote of confidence in the SAG's economic policies and performance, at a time when many countries have been down-graded because of the global financial crisis. The upgrading of South Africa's foreign currency rating will lower the cost of borrowing in international markets and increase the appeal of South African assets to overseas investors. CONNERS