Executive Summary

  • In this document, we highlight the impact of the credit rating downgrade, market developments post the downgrades, key metrics to watch ahead of the upcoming reviews and how SA compares with its EM peers. We remain of the opinion that Moody’s will likely downgrade both the LC and FC credit ratings both by one notch to Baa2 (one notch above investment grade) with a negative outlook. We believe that this is premised on elevated political risk, a lack of structural reform implementation, a shift in focus to radical economic transformation which may worsen fiscal metrics, a push for nuclear which will also likely worsen fiscal metrics, rising contingent liabilities which would place greater burden on state resources and deteriorating growth metrics, confidence levels and private sector investment. Should the abovementioned metrics worsen by August or November, then Moody’s may be forced to further lower the credit ratings to sub-investment grade. We believe that we are likely to see both S&P and Fitch maintain their FC and LC credit ratings and the respective outlooks at the upcoming reviews.
  • Growth is expected to remain benign, while inflation will likely ease off to below 6% and remain below the upper band over the next 12 to 18 months. The SARB remains concerned about the trajectory of the rand – any flare up in political risks would hamper the rand exchange rate, which may feed through to headline CPI. As a result, we believe the SARB will keep rates unchanged this year. Thereafter, when the political picture is clearer and event risks have subsided, we may see two rate cuts in early 2018, especially if low inflation does materialise.
  • As a departure point, we outline the S&P ratings methodology. The S&P methodology assigns scores between one (strongest) and six (weakest) across the five categories below. This is done by assessing the determining factors and adjusting the assessments based on the adjustment factors below. The scores are averaged within two subcategories and the matrix below is used to provide an indicative rating. The indicative rating is given an uplift based on supplemental data or evidence. A final foreign currency rating is achieved. The local currency rating is provided with an uplift, based on monetary policy effectiveness and local bond market activity.
SACreditRatingsOverview_170504 (1)