Cablegate: South Africa's Credit Ratings

This record is a partial extract of the original cable. The full text of the original cable is not available.




E.O. 12958: N/A


1. (U) From the end of June through mid-July 2004,
several research and credit agencies (Fitch, Moody's
Ratings, Standard & Poor's, and the Economist
Intelligence Unit) presented to Johannesburg
audiences their outlook and ratings for Sub-Saharan
Africa and South Africa in particular. The
conclusions of all four agencies were similar. All
agreed that prudent fiscal and monetary policies
fueled expectations of higher economic growth in
2004 and 2005; however, medium term challenges serve
as constraints to long-term growth. If this growth
materializes and the rand stays strong, South
Africa's credit rating may improve. In addition,
the November 2004 revision of gross domestic product
may show actual growth to be substantially higher
than previously thought as a result of improved
manufacturing and services data being incorporated
into GDP. All agencies noted longer-term structural
problems that might inhibit improved credit ratings.
Currently South Africa is rated on a par with other
middle income countries but their peers do not face
the same unemployment, income inequality, poverty
and health problems that South Africa does. End

Similar Views on South African Perspectives

2. (U) Ratings agencies and research firms rate
South African strengths and weaknesses similarly.
Fiscal and monetary policies are deemed prudent as
the budget deficit is low, foreign debt is low,
inflation is under control, and the current account
balance is affordable. All agencies commend the
higher economic growth, with GDP growing 2.8 percent
between 1994 and 2003 compared to 1.5 percent growth
in the 1980s. All cite the same constraints facing
South Africa in the medium term, mainly structural
economic weakness against a background of
inequality. These include the economic impact of
HIV/AIDS, low levels of savings and investment,
rigidities in the labor market. Ratings agencies
cite the low levels of reserves as an impediment to
an upgrade in credit ratings. However, Moody's
Credit Ratings Officer thought that a ratings review
of South Africa might be in order if revised GDP
growth turns out to be significantly higher when the
November 2004 GDP revision is due.

Fitch Ratings

3. (U) Fitch Ratings emphasized improved growth
prospects in Sub-Saharan Africa, for 2004 and 2005,
4.5 percent and 4.7 percent, respectively, compared
to 2.7 percent in 2003. In March 2004, Fitch again
rated South Africa's long-term foreign currency
"BBB", and its long-term local currency at "A minus"
with a stable outlook, unchanged from its May 2003
ratings. Other peer countries in this category
include Thailand and Tunisia. Countries rated one-
notch above at BBB plus include Latvia, Lithuania,
Malaysia, Poland and Slovakia. Countries one notch
below include Croatia and Mexico.

4. (U) Fitch cited improvement in the public and
external debt ratios, falling inflation, and the
elimination of the net open foreign position leading
to an improvement in South Africa's liquidity
indicators as positive developments. Low
investment, social and economic inequities, and
lower growth than peer countries were factors on the
negative side. Fitch analysts noted that South
Africa and Nigeria were the engines for growth in
Sub-Saharan Africa and that South African firms had
been rapidly increasing their investment in the rest
of Africa. One issue raised is whether the rapid
increase of South African investment in 2003 is
sustainable, given the relatively small domestic
markets in other African countries.

Moody's Ratings

5. (U) Moody's feels that its optimistic
perspective in 1994 was vindicated. Since 1994,
Moody's has raised its "Baa3" country rating to Baa2
in 2001, and in February 2003 assigned a positive
outlook to its Baa2 long-term foreign currency
ratings. Credit Ratings Officer Kristin Lindow
suggested that South Africa might warrant another
review if it turns out that past growth was
seriously underestimated because incomplete coverage
of both the manufacturing and service sectors in the
national income accounts. Faster actualized growth
may improve investor perceptions towards viewing
South Africa as a fast growing market with high
investment potential.

6. (U) The reasons for the most recent credit
outlook upgrade to positive are the similar for
Moody's as other ratings agencies. Falling
inflation, low domestic and foreign debt, lower
interest rates, and improving external liquidity
made South Africa a better credit risk. On the
negative side, Moody's May 2004 Analysis also lists
the serious economic and social challenges ahead,
namely managing HIV/AIDS pandemic, reducing income
disparities, making inroads on unacceptably high
levels of unemployment, and increasing investment in
a climate compounded by low domestic savings and low
foreign direct investment, and exchange rate
volatility. One distinguishing characteristic of
Moody's analysis is the emphasis it placed on
political developments, including mentioning the
uncertainty clouding the next five years over the
succession question in the African National
Congress. Since foreign direct investment is low,
Kristin Lindow's views are that the source of higher
South African growth has to be domestic investment.
Because foreign portfolio investment far exceeds
foreign direct investment, its capital flows are
more volatile and short-term oriented. Moody's does
not foresee a change in the distribution of South
African foreign investment.

7. (U) Lindow also believes that the South African
Reserve Bank should increase its foreign reserves.
She points out that South Africa's $10 billion in
reserves is well behind the $20 billion in reserves
in its peer group. On the bright side, commercial
bank foreign assets have grown from $7.7 billion at
the end of 2002 to $16.3 billion by the end of
April. Moody's counts Malaysia, Saudi Arabia,
Bahrain, Mexico and India as peer countries.

Standard & Poor's Ratings

8. (U) In June 2004, Standard and Poor's rated 11
African countries at the request of United Nations
Development Program, including South Africa. Of the
11 countries, Tunisia and South Africa received the
highest long-term foreign currency rating at "BBB".
South Africa received the most improved rating since
its initial 1994 rating of "BB", reflecting progress
in fiscal and monetary reforms. Standard & Poor's
includes Mexico, Tunisia, Thailand, Oman, China and
the Slovak Republic as South Africa's country peers.
South Africa's socioeconomic problems of high
unemployment, income and land distribution
inequalities, skills shortage, high crime rates,
HIV/AIDS pandemic, and low economic growth are more
severe than those faced by its peers. These
challenges are counterbalanced by better fiscal and
monetary policies and transparency in budgeting and
planning compared to peer practices.

Economist Intelligence Unit's Analysis

9. (U) The Economist Intelligence Unit (EIU)
produced a South African country report in June 2004
primarily expecting an increase in growth over the
next two years compared to 2003's 1.9 percent due to
robust foreign growth, further strength in domestic
demand and growth in tourism. Increasing foreign
demand will help boost exports, but rising imports
will lead to a gradual reduction of the trade
surplus and a modest deterioration of the current
account deficit to 1.7 percent of GDP in 2004 and 2
percent in 2005. EIU's forecast is for a weaker
rand in 2005 as interest rate differentials begin to
subside with the global trend towards higher
interest rates. The EIU offers economic analysis
but does not rate countries.

10. (U) The EIU's country report provides more
detailed coverage of both the political, industrial
and financial sectors than the ratings agencies;
however, the focus is short-term, with 2005 as the
latest forecast year. EIU considers rigid labor
legislation and regulations concerning employment as
a major obstacle to more rapid job creation in the
private sector and doubts that GDP growth rates will
reach 5 to 6 percent. It cites a recent study by a
research group chaired by Roger Baxter of the
Chamber of Mines concluding that the low level of
domestic investment is the major reason for
lackluster growth rates. The study argues that
local business fails to invest because the cost of
capital is 8.5 percent when the average real rate of
return from listed companies is 8.6 percent. The
high cost of capital was the result of high real
interest rates, volatile inflation and exchange
rates, high corporate tax rates, and the perceived
risk of doing business in Africa.


11. (U) All analyses point to the same past fiscal
and monetary successes combined with serious mid to
long-term challenges that South Africa must overcome
before it qualifies for higher ratings. The private
sector will be the source of new jobs; however,
skills, labor flexibility, and investment would have
to be seriously improved before South Africa
experiences high enough growth to reduce poverty and
unemployment. Nevertheless, South Africa remains
the engine for Africa's growth; the IMF estimates
that every 1 percent increase in South Africa's
growth, sustained over five years, will add between
0.4 and 0.7 percent to African growth. South Africa
will have to increase domestic investment, upgrade
skills, attract more foreign investment, and provide
a more flexible labor environment to change the
views of these ratings agencies in a favorable way.

© Scoop Media

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