Sovereign Africa Ratings’ surprising investment grade for South Africa

Sovereign Africa Ratings (SAR) recently issued its first credit rating report on 23 September 2022, rating South Africa at investment grade.

With a stable outlook, SAR declared South Africa’s long-term sovereign status at BBB and B+ in the short term.

SAR’s rating goes against the three major rating agencies – Moody’s International, S&P Global, and Fitch Ratings – which account for about 95% of international rating activity and have placed South Africa’s credit rating into sub-investment territory.

SAR’s rating of South Africa effectively challenges these industry giants, who African countries have long criticized for their harsh handling of ratings and even potential bias against African economies.

An example of this was seen in Ghana earlier this year when the Ghanaian finance ministry shared its frustration with a decision taken by Moody’s to downgrade the country’s credit rating from B3 to CAA1.

Ghana rejected the rating, saying that Moody’s failed to take into consideration critical information specific to Ghana as an African economy.

Sovereign Africa Ratings’ alternative perspective

The Financial Sector Conduct Authority (FSCA) approved the ratings licence of the new Gauteng-based agency – Sovereign Africa Ratings (SAR) – in March 2022.

SAR emerged from the 54th session of the Conference of African Ministers of Finance, Planning and Economic Development held earlier this year.

SAR’s logic is that big global rating agencies simply don’t understand African economies.

SAR’s chief executive Sfiso Falala told the SABC that different African economies are at various levels of industrialisation or digitisation. Therefore, the ‘one-size-fits-all’ evaluation used by global agencies cannot be applied.

“There are many factors that tried and trusted agencies use to arrive at a rating. But these include developmental indices that are regarded as somewhat subjective – such as corruption, governance, and legislation,” said Falala in an interview with Bruce Whitfield on The Money Show.

SAR’s methodology, rather, focuses on all traditional rates used by other agencies but includes the structural framework of a country and its resource endowment.

“Our model starts out with one that best fits the situation and structure of a given economy, using a methodology that involves no less than 82 attributes that assess important pillars such as macroeconomics, socio-political situation, and governance,” said Falala.

This model of analysis has resulted in South Africa’s rating being different to that of the ‘big three’ ratings agencies.

SAR’s analysis of South Africa

Using its unique methodology, SAR granted South Africa a long-term rating of BBB and B+ in the short term.

This rating takes the country out of Junk status, and SAR attributes its rating to South Africa’s reliance post-Covid as Banks hold adequate capital, and the country has increased tax revenue over the past two years.

This goes against Moody’s most recent ratings given to South Africa, which placed South Africa two points below investment grade at a Ba2 rating – while S&P Global and Fitch ranked the country three points below at a BB- rating.

SAR noted in its report that it took into account South Africa’s performance in terms of macroeconomic and non-economic fundamentals, including the direction and assessment of the country’s key economic indicators, such as:

• Natural resource endowments.
• Climate change risks.
• Social and socio-economic fundamentals.
• Economic growth.
• Government debt (domestic and foreign currency denominated).
• Gross loan debt and contingent liability profile.
• Budgetary performance and adequacy of fiscal flexibility.
• External performance.
• Monetary and fiscal policy stance.
• Liquidity position and institutional.
• Governance framework.

SAR highlighted that the rating was supported by the government’s reconstruction and recovery plan, which aims to address some of the country’s challenges, such as:

• High unemployment.
• Poverty and income inequality.
• Energy and water crises.
• Deteriorating infrastructure and logistics networks.

However, the rating agency noted that the country still faces challenges, namely rising debt and rising contingent liabilities such as servicing state-owned entities.

Falala also noted that while countries pay the ‘big three’ agencies to conduct and assign a rating, the SAR’s rating of South Africa was done independently and without funding from the South African government to avoid a conflict of interest.

South Africa is the first country to receive a rating from SAR since it received its licence. The agency has said it aims to investigate other emerging markets, including those in South America and Asia.

The graphs below show South Africa’s credit rating issued by the ‘big three’ agencies from 1994 to 2022.