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25 Mar 2018

MPC outlook: the tone is likely to have become more dovish now Moody’s has upgraded SA’s outlook to stable with no rating change

Annabel Bishop

Chief Economist

Figure 1: SA Consumer Inflation: history and forecasts

Moody’s recent country review of South Africa’s credit ratings saw a stabilisation at the last rung of subinvestment grade (Baa3 – see figures 3 and 4), completing the process after the country was placed on review for a downgrade (to sub-investment grade) on 24th December 2018. SA consequently escaped a downgrade by all three key agencies to sub-investment grade (Fitch and S&P have SA on BB+ for the local currency long-term sovereign rating, and BB+ and BB respectively for the country’s foreign currency long-term sovereign rating). Specifically, in its rationale to keep SA on investment grade Moody’s said “(t)he South African government’s credit profile is supported by a diversified economy, a sound macroeconomic policy framework and deep financial markets. Credit constraints include the rising debt burden and fiscal risks stemming from contingent liabilities as well as persistently low growth, which nevertheless shows signs of a gradual recovery.” We expect no credit rating downgrades for South Africa this year from any of the key agencies (see “SA retains its investment grade status from Moody’s while the change to a stable outlook signals a stabilisation of the rating - an improvement as the country was placed on review for downgrade last year on 24th November”, 24th March 2018, see website address below). Moody’s has also outlined reasons for a future upgrade, which tie in with the objective of the Ramaphosa Presidency (see “Economic outlook 2017–2023: Global growth is expected to strengthen somewhat further; for SA’s growth free market policies are key”, 5th January 2018). The rand has strengthened to R11.60/USD, R14.35/EUR and R16.21/GBP from R11.90/USD, R14.67/EUR and R17.02/GBP on Friday on relief a Moody’s downgrade was avoided, with markets anticipating further strength. The immediate market cheer was seen to be limited however, as EWC (Expropriation without Compensation) proceedings

Figure 2: Forecasts
Figure 3: Foreign Currency – Long term

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