South Africa has made it through another scheduled Moody’s review to retain its local currency investment-grade rating with a stable outlook.
The news will come as a relief to the country’s finance minister, whose first budget speech made a sizeable allowance for the struggling utility giant, Eskom, but risked irking the rating agency by lacking any concrete turnaround plan for the energy producer.
As we wrote last month, Moody’s had previously said that it would only view meaningful government support for Eskom as credit-neutral if it were accompanied by an immediate cost-reduction plan that could be implemented imminently.
It seems the tough stance taken by the National Treasury was enough to appease Moody’s
The National Treasury has made it clear that any future transfers to Eskom (or any other state-owned entity) would come with conditions attached. It also made great efforts to offset much of the cost of this bailout by cutting costs in the later years of the budget, particularly through the reduction in the wage bill. Evidently this was sufficient to appease Moody’s and help it to overlook the economic burden of recent rolling blackouts blighting the country.
Across some of our strategies we are positioned relatively cautiously in South African assets given the fragility of an economy weighed down by struggling state-owned companies and weak long-term growth dynamics, which the recent blackouts have further exacerbated.
Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.