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CAPE TOWN - South Africa is expecting a further credit rating by ratings agencies, after the Budget Speech on Wednesday, February 21. 

Academics are now saying that agencies should upgrade SA’s rating. 

This comes after the recent political developments, with newly-elected President Cyril Ramaphosa assuming Presidency on February 15. 

According to academics, Director at the Centre for Business Mathematics and Informatics, North-west University, Professor Riaan de Jongh and Barclays Africa Chair in Actuarial Science, Department of Actuarial Science, University of Pretoria, Dr. Conrad Beyers, the likelihood of further downgrades of SA’s sovereign credit ratings during 2018 appear to be remote. 

“All indications point to a more business-friendly environment under the Ramaphosa administration. This, together with fundamental changes in respect of fiscal policy and management, large-scale corruption and a solution-oriented approach can go a very long way towards restoring investor confidence. It is still very early days to make specific projections, but it can be seen as safe to say that the Ramaphosa administration would do everything in its power to maintain the current positive sentiment that may be a driving force behind investment decisions”, said Beyers. 

When asked whether the current positive sentiment is enough to adjust SA’s sovereign debt, Beyers said that there are indications that past ratings decisions were, to a large extent, reactions to political risks that prevailed in 2017 and earlier.

“Political risks overshadowed all other risks to the South African economy during the previous years. This means that rating agencies should recognise that the fact that politically related risks, such as fiscal mismanagement and large-scale corruption, are expected to be significantly less pronounced. Hence this at least implies that rating agencies should reconsider any negative economic outlook factors that were related to political risks”, said Beyers. 

While Beyers acknowledged that corruption exists across the world, he said that it will, however, be a major step forward if these factors are brought under control to be at least in line with international trends - or even better.

Meanwhile, De Jongh said that credit rating agencies should seriously consider an upward adjustment of the current rating for South Africa, or at least change the outlook from ‘negative’ to ‘positive’ due to the ‘forward-looking nature’ of the sovereign rating.

De Jongh said that Ramaphosa’s address at SONA is the start of a new beginning and an important change in how government will address deficiencies. 

While Beyers notes that political risks were the driving force behind SA’s downgrade to junk status in 2017, he says that these risks are expected to have a reduced impact on the economy. Therefore, he says that these ratings agencies should review their ratings. 

“As noted - rating agencies are invited to explain their decisions and considerations for their ratings decisions under the new circumstances. We are especially interested in how their previous decisions involved considerations regarding the political environment and how this might change in future”, said Beyers. 

Both Beyers and De Jongh call on ratings agencies to explain their modelling and ratings decisions. 

They acknowledge that there are still significant risks within the economy. 

However, they are optimistic that “a more business-friendly environment, non-interference in the South African financial system, guarantees of the independence of the judiciary and National Treasury as well as can be seen as significantly credit positive”. 

Why a higher rating for South Africa?

A country’s sovereign rating depends on several factors such as a country’s economic strength and fiscal factors yet there is a great importance placed on a country’s historical performance. 

However, Beyers says that if there are expected changes to economic expectations, there could be sufficient justification for ratings reviews. 

Potential short-term effect of upward ratings adjustments

Beyers and De Jongh believe that if South Africa’s credit outlook receive upward adjustments, this may add to the positive sentiment of the country. In turn, this could encourage investment from the international community. 

The main concern is that credit rating agencies tend to rate institutions within a country at or below the sovereign rating, says Beyers. 

“The main reason is that sovereigns are viewed by the agency as the lowest risk credit in their local market or currency”.

Based on this, the academics said that South Africa can benefit from an upgraded sovereign credit rating.

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