Hilary Joffe and Ayanda Shezi

INTERNATIONAL ratings agency Standard & Poor’s has upgraded SA’s sovereign credit rating, in a move that will help to cut the cost of capital further for the country’s public- and private-sector borrowers.

S&P’s upgrade, which the agency said was prompted by SA’s stronger economic growth prospects and reduced vulnerability to external shocks, comes after rival agency Moody’s upgraded SA’s credit rating in January.

The third of the big rating agencies, Fitch, has SA on positive ratings watch, indicating an upgrade could be on the cards later this year.

The S&P upgrade raises SA’s foreign currency rating from triple B to triple B plus, putting it three levels above the entry-level investment grade rating and bringing SA to within one notch of the coveted A category. SA’s foreign rating is now on a par with Poland and Thailand and is one notch ahead of Mexico.

The rand raced to two-month highs and bonds gained on the news. The rand gained 0,8%, briefly touching R6,50 against the dollar, while the yield on the benchmark R153 government bond fell six basis points to 7,5%.

Sovereign credit ratings are a measure of a government’s creditworthiness — a higher rating implies less risk for investors, so they will be willing to accept lower yields (interest rates) on that government’s debt, making it cheaper for the country and its corporations to borrow on local and international markets.

S&P credit analyst Beatriz Merino said the agency was now confident that SA’s economy was more resilient than before. Economic growth prospects for this year were even better than last year’s. And the South African economy, which had previously been highly vulnerable to changes in investor sentiment to emerging markets, had reacted well earlier this year when funds flowed out of other emerging markets in response to higher US interest rates.

She said, however, that although government’s record of economic policy management was very good, there were still problems in delivery. S&P remained concerned about unemployment, poverty and income disparity. These, the agency said, distinguished SA unfavourably against its peers.

National treasury director-general Lesetja Kganyago said the upgrade reflected SA’s ever-improving investment climate and reduced country risk premium. It would help to lower the cost of capital and the cost of doing business in SA.

Government earlier this year cancelled its planned $1,5bn international bond issue as it did not need the money.

However, more favourable investor sentiment and ratings upgrades have helped to narrow the spread on the 10-year dollar bond that SA issued last year, from 195 basis points over the benchmark US treasury rate down to about 80 basis points on the market.

Kganyago said if SA were to go back to international bond markets it could now borrow at double-digit spreads, not the triple-digit spreads of earlier years.

"We will go into international markets as soon as we feel we need the money," Kganyago said.

Local analysts said the news raised the possibility of an interest rate cut when the Reserve Bank’s monetary policy committee meets next week.