Brazil's debt reduction prompts outlook changed to positive from stable
Moody's Investors Service has changed its ratings outlook to positive from stable for Brazil's key foreign-currency ratings due to a significant reduction in the ratio of external debt to current account earnings.
The effected ratings include the B1 foreign-currency country ceiling for bonds and notes as well as for the B2 foreign-currency bank deposit ceiling.
The outlook for the Federative Republic of Brazil B1 foreign-currency bonds was also changed to positive from stable. The outlook change to positive from stable also applies to the Ba3 local-currency government bond rating.
The external-debt-to-current-account-earnings ratio has steadily declined to nearly half of the 1999 ratio. Other factors leading to the outlook change include the strong fiscal results and the change in the composition of the local-currency debt with a continued reduction in the share of dollar-indexed debt.
Slovakia's ratings upgraded a notch to A2 on structural reform and fiscal rectitude
Moody's Investors Service has raised the long-term foreign-currency ceilings for the bonds and bank deposits of the Republic of Slovakia to A2 from A3, and the short-term foreign currency country ceiling to P-1 from P-2 in light of the government's solid record of structural reforms and the improving medium-to-long-term outlook for fiscal rectitude.
The ratings on outstanding medium-to-long-term government bonds denominated in both local and foreign currency were also upgraded to A2 from A3. The outlooks for all the ratings are positive.
Moody's action follows an extended period of continual improvement in Slovakia's macroeconomic performance, which has been underpinned by significant structural reforms and consolidation of market-oriented social and economic institutions.
In aggregate, said the rating agency, these changes have created one of the strongest business environments in Central and East Europe, attracting substantial foreign direct investment. Greater productive efficiencies, the streamlining of the public sector, and major structural reforms are set to place Slovakia on a sustainable path of economic growth and fiscal rectitude.
The ability of a succession of coalition governments to pursue important structural reforms with or without parliamentary majorities speaks to a maturation of the country's politics. The consensus on these questions extends to prudent fiscal and monetary policies that currently place Slovakia in a position to enter the so-called ERM II, a prerequisite for introduction of the euro, and actually adopt the euro in advance of three larger European neighbors, Poland, Czech Republic, and Hungary.
South Africa upgraded to Baa1 from Baa2
Moody's Investors Service has upgraded South Africa's country ceilings for foreign currency debt and bank deposits to Baa1 from Baa2, principally reflecting the substantial strengthening of the country's foreign reserves position. The outlook is stable.
Accordingly, the ratings on the Republic of South Africa's foreign currency-denominated bonds and notes have also been raised to Baa1 from Baa2, with a stable outlook. The upgrades conclude a rating review that began in October.
The government's A2 domestic currency debt rating was affirmed, also with a stable outlook. This rating had not been placed on review since the country's public finance indicators are considered appropriate to the existing rating.
Moody's said that the upgrades are based largely on substantial improvements in official external liquidity, since foreign debt levels were already moderate and broadly consistent with higher-rated nations. South Africa had previously been an outlier compared to other Baa-rated countries, with manageable external debt but relatively low reserves. This dichotomy had contributed to financial and exchange rate volatility in recent years, and was an important explanation for the wide, three-notch difference between the government's domestic- and foreign-currency ratings. The gap has now been narrowed to two notches.
The rating agency also pointed to several other factors that supported the upgrades, among them the faster growth now underway and heightened investor optimism about the country's future prospects. More robust growth plus stable prices and low real interest rates are the fruits of a decade of macro- and micro-economic reforms that generated greater prosperity, reconnected and enhanced South Africa's financial and trade linkages with the rest of the world, and improved the government's capacity to respond to the still-large social and infrastructure needs of its population.
Moody's noted that the recently quicker pace of growth helped to boost imports and push the trade balance into deficit in spite of the commodity cycle upturn. As a consequence, the current account shortfall is likely to continue to grow, particularly with an overvalued rand impeding the competitiveness of manufacturing exports. Thus far, however, capital inflows have more than comfortably covered the country's external financing needs, even allowing for a substantial buildup in reserves.
Although a large portion of capital inflows has been portfolio-related, a disturbingly large amount could not be identified, and Moody's therefore concludes that these inflows are vulnerable to reversal in the event of various changes in global or local circumstances. On the other hand, the Reserve Bank's healthier reserve cushion and its commitment to a floating exchange rate should permit a relatively smooth adjustment as compared to earlier episodes of capital account volatility.
Moody's also emphasized that South Africa faces formidable long-term challenges related to chronic poverty and unemployment, whose grip has become more intractable with the spread of HIV/AIDS. These problems are being addressed gradually, with skills training, education budgets, targeted government spending, national health insurance, and hopefully, black economic empowerment initiatives that will benefit the broader population. The government's response to HIV/AIDS has been frustratingly inadequate, although a substantial increase in resources is finally being channeled in the area such as through the fledgling anti-retroviral treatment program.
In facing these challenges, it would seem that the African National Congress government is not complacent, in spite of having been elected last April by a record margin and rightly boasting considerable economic and political success in the first decade after the democratic transition. The authorities appear determined to record further progress towards bridging wide income disparities through both public and private sector efforts. Moody's acknowledges the sensible motivations behind these strategies, but cautions against an overly expansive fiscal stance that would endanger policymakers' hard-won reputation for fiscal prudence.