October 17, 2004

By Andile Ntingi

Johannesburg - The decision by international ratings agency Moody's to consider upgrading South Africa's credit rating placed the country in a better position to attract significant capital inflows, while reducing the cost of borrowing in the offshore markets, economists said on Friday.

If Moody's raises the country's rating from the current Baa2 to Baa1, it will be ranked along with the likes of China, Malaysia and Thailand. All attract sizeable amounts of foreign direct investment (FDI) and, as a result, have higher economic growth rates. Put simply, a Baa2 rating is a lower investment grade, while Baa1 is a higher investment grade.

Moody's imminent upgrade of South Africa's rating is another endorsement of the country's minimal reliance on foreign debt, its improved external liquidity position and its market-friendly macroeconomic policies. External liquidity is foreign exchange and gold reserves holdings.

Economists say if Moody's upgrades, Standard & Poor's and Fitch are likely to follow suit.

Colen Garrow, chief economist of Brait, said: "If we receive an upgrade, it will be cheaper for the government to borrow abroad. It also means that foreign funds are more inclined to raise their holding of South African assets such as bonds and equities."
Rudolf Gouws, the chief economist at Rand Merchant Bank, said: "It will be a reflection of how much further things have developed domestically. We are now a lower-risk economy to foreign investors and are growing rapidly."

South Africa has been struggling to entice meaningful inflows of FDI. An upgrade by Moody's could prove to be a catalyst.
 
When apartheid ended in 1994, the government set out to cut government debt, relaxed exchange controls somewhat and introduced international competition.

But it had to deal with a weak external liquidity situation, which often resulted in the depreciation of the rand. In the midst of the 1998 emerging markets crisis, the Reserve Bank borrowed about $25 billion to help bolster its reserves to defend the rand. That strategy did not work, leaving South Africa with a deficit in its liquidity position.

"This vulnerability contributed to considerable volatility in capital account movements and thus in the exchange rate, in turn with profound effects on growth and employment," Moody's said.

The bank has since paid off its debt and has been slowly building its reserves, currently well over $12 billion (R78.33 billion).

Moody's said South Africa's weak economic growth relative to other emerging market countries was a constraint to its rating: "Growth must be substantially higher than the 3 percent average achieved since 1996 to begin to address high unemployment rates and wide income disparities." South Africa's official unemployment rate is around 27.8 percent.

But Moody's did note the strong economic performance this year, particularly a strong upturn in investment spending and robust demand. Low interest rates at 23-year troughs are fuelling shopping in the economy and economists expect the good times to continue despite the central bank leaving rates unchanged last week.