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.

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Moody's Decision
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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."

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Foreign Currency Rating Upgraded
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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.

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Local Currency Rating Downgraded
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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."

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Local Reaction
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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."

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Comment
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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