Moody's mulls IDC, DBSA rating downgrades
July 27, 2009
By SAMANTHA ENSLIN-PAYNE
Rating agency Moody's Investors Service has warned that the foreign currency rating of the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) might be downgraded, but the IDC and DBSA say such a move would not affect their ability to raise funds.
This is because any such downgrade was part of Moody's strategy to realign the ratings of financial institutions related to governments with the sovereign ratings rather than because of a perceived risk at these institutions.
Paul Baloyi, the chief executive of the DBSA, said even though any downgrade would be a technical realignment "we would prefer it not to happen as we certainly do not want it to create a bad perception".
The DBSA and the IDC are rated above the government. Baloyi said the reason for this was that, among other things, the DBSA was self sustaining.
These two institutions are expected to play a key role in helping South Africa to recover from the impact of the global financial crisis. The IDC expects to spend R6 billion in the next two years assisting companies.
Gert Gouws, the IDC's chief financial officer, said a downgrade by Moody's would result in the cost of borrowing increasing slightly, by between five and 10 basis points.
Moody's said last week it had placed on review for possible downgrade the A2 foreign currency long-term issuer ratings of the IDC and DBSA.
Constantinos Kypreos, a vice-president and senior analyst at Moody's, said the companies' development mandates and 100 percent government ownership implied that they would be supported, if required. However, the government's structural economic weaknesses meant the most likely outcome would be to align the ratings of these institutions with South Africa's A3 government rating.
Gouws said: "We believe a downgrading will not make it more difficult to raise funds." This was because the IDC was seen as "very close to a sovereign risk".
Last week Moody's aligned South Africa's local and foreign currency ratings at A3 - the foreign currency rating was upgraded and the local currency rating was downgraded.
Supporting the upgrade to the foreign currency sovereign rating was the government's astute debt management and the fact that South Africa had been more resilient to the global crisis, with the banking system feeling little direct impact due to the prudent regulatory environment.
But the local currency rating was downgraded because of medium-term debt related to the massive infrastructure spending and more generous social transfers, Moody's said.
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