South Africa’s credit ratings have been in the news a lot recently.  With much talk of a possible downgrade to junk status, the anticipation of the revised ratings has been rather like waiting for a bad school report.

Here is South’s Africa’s most recent ‘report card’ from the three ‘world players’ in the rating industry – Moody’s, Standard & Poor’s and Fitch:  

  • Moody’s: Baa 2/Negative
  • Standard & Poor’s (S&P) : BBB-/Negative
  • Fitch: BBB-/Stable

How does this ‘marking system’ work?

The rating system varies between the three rating agencies.

The highest-rated investment grade securities are AAA or Aaa (triple A).

An investment grade rating lies within the range of Aaa to Baa3 (Moody’s) or AAA to BBB- (S&P). The lowest possible investment grade rating is BBB- (S&P) and Baa3 (Moody’s).

Credit ratings for bonds below these designations (‘BB’, ‘B’, ‘CCC’, etc) are considered to be low credit quality, also known as high yield or junk bonds.

What does a negative outlook mean?

A negative outlook is a ‘reality check’ and is often the first step towards a downgrade.

What is the significance of sovereign credit ratings?

  • Credit ratings are used by sovereign wealth funds, pension funds and other investors to assess the credit worthiness of bond issuers (countries which borrow money by issuing IOU’s known as bonds).
  • The ratings are a measure of the political and economic risk of investing in a country and give an indication of the likelihood that the country will repay debt.
  • Lower credit ratings result in higher borrowing costs because the borrower is deemed to carry a higher risk of default.

Its seems that this time round, the rating agencies have decided that South Africa, after several years of falling growth, may be reaching a turning point. They appear to be allowing the country more time for the promised economic reforms take effect and for indications of an economic recovery.

It is thought that South Africa’s ratings will be reviewed again towards the end of the year.