FIXED INCOME CREDIT INSIGHTS - Nedbank
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FIXED INCOME
CREDIT INSIGHTS
Jones Gondo | JonesG@Nedbank.co.za
Nthulleng Mphahlele | NthullengM@Nedbank.co.za
SA SOVEREIGN CREDIT RATING PREVIEW – MOODY’S
We expect South Africa’s investment-grade rating to be affirmed at Baa3/Stable, although a
Negative outlook is probably more appropriate for the next 12-18 months
By now, the sovereign rating committee at Moody’s Investors Service (Moody’s) has likely reviewed South Africa’s credit
rating in the second of two scheduled reviews for this calendar year – 23 March 2018 and 12 October 2018. A
confidential version of the rating report probably sits on the desk of the newly sworn-in Minister of Finance Tito
Mboweni, scheduled to be released to the public after the close of markets at 21h30 (GMT) on Friday, 12 October 2018;
but technically, it could also be released prior to the opening of markets at 06h00 (GMT) on Monday, 15 October 2018,
as per Moody’s Sovereign Ratings Policy.
Sovereign Rating Release Dates – Fitch Ratings and S&P Global Ratings
Fitch Ratings: No scheduled reviews. The primary analyst (Jan Friederich) is based in Hong Kong – a jurisdiction
that does not require the publication of a sovereign rating release calendar, as is the case for EU-based analysts.
However, we estimate that release dates will fall within a six-month period after the last publication.
o Last Rating Review Date: 15 June 2017
o Next Expected Rating Review Dates: 19-23 November 2018 or by 14 December 2018 the latest
S&P Global Ratings:
o Last Rating Review Date: 25 May 2018
o Next Scheduled Review Date: 23 November 2018
Moody’s has South Africa’s sovereign rating at “Baa3”, which is one notch above speculative grade. We were surprised
that the rating outlook was revised to “Stable” from “CreditWatch Negative” in the March 2018 review. We understand
that the CreditWatch was no longer needed after the ANC elective conference event risk receded and the February
Budget showed a return to fiscal restraint compared to the October 2017 Medium Term Budget Policy Statement
(MTBPS). However, we think that global macroeconomic headwinds and the depth of the challenges in South Africa’s
real economy still warranted a Negative outlook, rather than a move to Stable. We think that the Moody’s committee
may have been too optimistic about how fast South Africa’s political and economic prospects would turn around after
President Ramaphosa’s administration was inaugurated. Unfortunately, the economic climate in South Africa has been
difficult, policy uncertainty persists, and the economic reform process remains slow. As a result, the economy entered
a technical recession, GDP growth forecasts were cut by the IMF to 0.8% for 2018 (2019: 1.4%, 2020: 1.7%, 2021: 1.8%,
2022: 1.8%), and business confidence continues to dissipate. We expect these conditions to remain until the April 2019
general elections, with growth beginning to pick up only late in 2019. We expect the low-growth environment to put
significant strain on the sovereign’s revenue collection performance and debt sustainability, and believe the stimulus
plans are unlikely to have a meaningful impact on the country’s socio-economic conditions. Hence, we believe a
Negative outlook is probably more appropriate for the next 12-18 months. Nevertheless, the committee could still
decide to maintain its Stable outlook at this review and remain convinced by the new administration’s ability to manage
the economy onto a better footing, believing that the balance of risks to South Africa’s medium- to long-run fiscal
position is manageable and credit metrics will remain broadly in line with a “Baa3” rating assessment level and are
comparable to peers’.The resignation of Nhlanhla Nene and the appointment of Tito Mboweni in his place are unlikely to concern the Moody’s committee. Tito Mboweni is well regarded, and the departure of Nhlanhla Nene highlights good governance and leadership, which was in deficit in the previous administration. The important point is that the new minister is expected to stick to a consistent fiscal policy stance at the next MTBPS and to ensure that the implementation of structural reforms is not encumbered. In the table below, we track Moody’s sovereign rating scorecard for South Africa and highlight the particular rating- factor pressure points that could underpin a change in outlook, as per its scoring grid. 11 October 2018 | Page 2 of 5
Appendix
Table 1: South Africa’s scorecard
South Africa (24 November 2017) South Africa (23 March 2018) Rating Score Thresholds
Sub-factor Indicative factor Final factor Indicative factor Final factor
Rating factor Indicator Indicator VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
weighting score score score score
Factor 1: Economic strength M+ MODERATE+ M+ MODERATE+
Growth dynamics 50%
Average real GDP growth (2012-2021F) 50% 1.6 1.8 ≥4.5 4-4.5 3.5-4 3-3.5 2.75-3 2.5-2.75 2.25-2.5 2-2.25 1.75-2 1.5-1.75 1.25-1.5 1-1.25 0.75-1 0.5-0.75 -3
Foreign currency debt/general government debt 0-0.5 0.5-1 1-2 2-4 4-6 6-8 8-10 10-15 15-20 20-25 25-30 30-40 40-50 50-60 ≥60
0 0
(2016) ->0 ->0 ->0 ->0 ->0 ->0 ->0 ->0 ->0 ->-1 ->-2 ->-3 ->-4 ->-5 ->-6
Other non-financial public-sector debt/GDP (2016) -1 -1 Contingent liabilities
Public-sector assets/general government debt
0 0
(2016)
Government financial strength (F1xF2xF3) H- MODERATE+ H- MODERATE+
Factor 4: Susceptibility to event risk Max. function M- MODERATE- L+ LOW+
Political risk M- M- L+ L+
Worldwide Voice and Accountability Index (2016) 0.6 0.6South Africa (24 November 2017) South Africa (23 March 2018) Rating Score Thresholds
Sub-factor Indicative factor Final factor Indicative factor Final factor
Rating factor Indicator Indicator VH+ VH VH- H+ H H- M+ M M- L+ L L- VL+ VL VL-
weighting score score score score
Gross borrowing requirements/GDP 7.3 7.2 ≥40 37.5-40 35-37.5 32.5-35 30-32.5 27.5-30 25-27.5 22.5-25 20-22.5 17.5-20 15-17.5 12.5-15 10-12.5 5-10Disclaimer This report is personal to the recipient and any unauthorised use, redistribution, retransmission or reprinting of this report (whether by digital, mechanical or other means) is strictly prohibited. The information furnished in this report, brochure, document, material, or communication (‘the Commentary’), has been prepared by Nedbank Limited (acting through its Nedbank Capital division), a registered bank in the Republic of South Africa, with registration number: 1951/000009/06 and having its registered office at 135 Rivonia Road, Sandton, Johannesburg (‘Nedbank’). The information contained herein may include facts relating to current events or prevailing market conditions as at the date of this Commentary, which conditions may change and Nedbank shall be under no obligation to notify the recipient thereof or modify or amend this Commentary. The information included herein has been obtained from various sources believed by Nedbank to be reliable and expressed in good faith, however, Nedbank does not guarantee the accuracy and/or completeness thereof and accepts no liability in relation thereto. Nedbank does not expressly, or by implication represent, recommend or propose that any securities and/or financial or investment products or services referred to in this Commentary are appropriate and or/or suitable for the recipient’s particular investment objectives or financial situation. This Commentary should not be construed as ‘advice’ as contemplated in the Financial Advisory and Intermediary Services Act, 37 of 2002 in relation to the specified products. The recipient must obtain its own advice prior to making any decision or taking any action whatsoever. This Commentary is neither an offer to sell nor a solicitation of an offer to buy any of the products mentioned herein. Any offer to purchase or sell would be subject to Nedbank’s internal approvals and agreement between the recipient and Nedbank. Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers and may not be considered to be binding on Nedbank. All risks associated with any products mentioned herein may not be disclosed to any third party and the recipient is obliged to ascertain all such risks prior to investing or transacting in the product or services. Products may involve a high degree of risk including but not limited to a low or no investment return, capital loss, counterparty risk, or issuer default, adverse or unanticipated financial markets fluctuations, inflation and currency exchange. As a result of these risks, the value of the product may fluctuate. Nedbank cannot predict actual results, performance or actual returns and no guarantee, assurance or warranties are given in this regard. Any information relating to past financial performance is not an indication of future performance. Nedbank does not warrant or guarantee merchantability, non‐infringement or third party rights or fitness for a particular purpose. Nedbank, its affiliates and individuals associated with them may have positions or may deal in securities or financial products or investments identical or similar to the products. This Commentary is available to persons in the Republic of South Africa, financial services providers as defined in the FAIS Act, as well as to other investment and financial professionals who have experience in financial and investment matters. All rights reserved. Any unauthorized use or disclosure of this material is prohibited. This material may not be reproduced without the prior written consent of Nedbank, and should the information be so distributed and/or used by any recipients and/or unauthorized third party, Nedbank disclaims any liability for any loss of whatsoever nature that may be suffered by any party by relying on the information contained in this Commentary. Certain information and views contained in this Commentary are proprietary to Nedbank and are protected under the Berne Convention and in terms of the Copyright Act 98 of 1978 as amended. Any unlawful or attempted illegal copyright or use of this information or views may result in criminal or civil legal liability. All trademarks, service marks and logos used in this Commentary are trademarks or service marks or registered trademarks or service marks of Nedbank or its affiliates. Nedbank Limited is a licensed Financial Services Provider and a Registered Credit Provider (FSP License Number 9363 and National Credit Provider License Number NCRCP 16). 11 October 2018 | Page 5 of 5
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