R 201450Z JUL 09
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC 9095
CIMS NTDB WASHDC
INFO SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
DEPT OF COMMERCE WASHINGTON DC
DEPT OF TREASURY WASHINGTON DC

UNCLAS PRETORIA 001463 
 
 
DEPT FOR AF/S; AF/EPS; EB/TPP 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
TREASURY FOR DAN PETERS 
DEPT PASS USTR FOR WILLIAM JACKSON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EMIN ENRG ETRD BEXP KTDB SF
SUBJECT: SOUTH AFRICA RECEIVES AN A-CATEGORY CURRENCY RATING FROM 
MOODY'S 
 
1.(U) Summary.  Moody's raised South Africa's foreign currency 
rating from Baa1 to A3, while simultaneously lowering its local 
currency rating from A2 to A3, on July 16, 2009.  South Africa's 
improved foreign currency rating reflected a build-up in official 
foreign currency reserves and a net foreign asset position in the 
banking system.  Moody's decision to downgrade the local currency 
rating reflected concern about the deterioration in the South 
African government's (SAG's) fiscal position.  Most analysts 
welcomed Moody's decision.  End Summary. 
 
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Moody's Decision 
----------------- 
 
¶2. (U) Moody's raised South Africa's foreign currency rating from 
Baa1 to A3, while simultaneously lowering its local currency rating 
from A2 to A3, on July 16, 2009.  According to Moody's, this was 
largely a technical action to align the local and foreign currency 
ratings (at A3) so that "they are now consistent with the way 
Moody's rates the governments of countries that are well integrated 
into the global economy, making no differentiation in a government's 
creditworthiness on the basis of currency denomination." 
 
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Foreign Currency Rating Upgraded 
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3 (U) According to press reports, Moody's senior Vice-President 
Kristin Lindow said the upgrade of South Africa's foreign currency 
rating reflected a build-up in official foreign currency reserves 
and a net foreign asset position in the banking system, which has 
been achieved in spite of a large current account deficit in recent 
years. [Note: According to South African Reserve Bank (SARB) data, 
South Africa's reserves increased to $35.8 billion in May 2009 from 
$27.8 billion two year earlier. End Note.]  Lindow also praised 
South Africa's sound government debt management, which relies on 
deep domestic capital markets and minimizes short term external 
liabilities. 
 
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Local Currency Rating Downgraded 
-------------------------------- 
 
¶4. (U) Moody's highlighted that the decision to downgrade the local 
currency rating a notch rather than upgrading the foreign currency 
two notches reflected concern about the deterioration in the SAG's 
fiscal position.  Over the short term, tax revenue will be lower due 
to the current recession, while expenditure will increase over the 
medium term because of increased infrastructure and social spending. 
 Moody's cautioned that even though debt levels were currently low, 
the economy's growth potential is likely to shrink in a less 
supportive global environment, implying that "reversing the upward 
debt trajectory will prove difficult." 
 
¶5. (U) According to press reports, Lindow said the two rating 
adjustments were, on balance, a "mild negative," as Moody's views 
the local currency rating as more important.  However, she told a 
journalist, "We think the consensus is that South Africa is an 
A-rated credit.  We think that South Africa is a stronger credit 
than a number of countries which used to be its peers." 
 
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Local Reaction 
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¶6. (U) Most analysts welcomed Moody's decision to upgrade South 
Africa's foreign currency rating, seen as a spectacular thumbs-up 
for South Africa in the midst of its first recession in 18 years. 
"We've entered the A league," Finance Minister Pravin Gordhan 
boasted to journalists.  Government bonds rallied after the news of 
South Africa's sovereign upgrade, with the yield on the benchmark 
R157 bond due in 2015 falling by about 10 basis points to 8.58% at 
one stage.  Likewise, the rand strengthened to R8.11/1$, after it 
had weakened to R8.30/1$ earlier in the week.  Standard Bank said, 
"The upgrade is a huge vote of confidence in the management of South 
Africa, which, along with reduced external vulnerabilities, now 
places the economy on a firmer footing to attract foreign direct 
investment. 
 
¶7. (U) According to press reports, Gordhan said South Africa will 
not tap the foreign market again this year, despite speculation that 
the increase in the deficit projection could lead to another 
Eurobond issue.  Treasury Director General Lesetja Kganyago echoed 
the minister at a press conference, adding that, although government 
has the fiscal space to borrow, the Moody's rating is "not a license 
to borrow limitlessly." 
 
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Comment 
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¶8. (U) Moody's decision to give South Africa an A-category currency 
rating is a vote of confidence in the SAG's economic policies and 
performance, at a time when many countries have been down-graded 
because of the global financial crisis.  The upgrading of South 
Africa's foreign currency rating will lower the cost of borrowing in 
international markets and increase the appeal of South African 
assets to overseas investors. 
 
CONNERS