The recent upgrading of South Africa's foreign currency rating by Moody's to Baa1 has raised expectations of further upgrades, by Moody's and by Standard & Poor's (S&P) and Fitch - which both in effect have South Africa one notch lower than Moody's at BBB.
For much of South Africa's ratings history, S&P has been one notch below Moody's.
While both agencies cite as concerns socioeconomic factors - poverty, unemployment, HIV/Aids - it appears that these are given greater weight by S&P.
Indeed, a S&P spokesperson was quoted after the Moody's upgrade as saying that it did not see a near-term prospect for an upgrade and that the improvement in external liquidity was simply consistent with South Africa's current rating.
Nevertheless, we believe that there is scope for an upgrade to BBB+ over time, with further balance of payments improvements.
In the nearer term, Fitch already has South Africa's BBB rating on positive outlook and will probably be the next agency to deliver an upgrade (to BBB+) relatively soon.
But can we expect another upgrade from Moody's in, say, the next 18 months, as some analysts have suggested? We think this will be far more difficult than some believe.
Another one-notch upgrade from Moody's would shift South Africa from the Baa category to the A category.
There is much excitement about the potential positive implications of this, because A is a significantly improved grade of credit risk.
But it is precisely this that will make an upgrade to the A category more difficult than the ones we have already seen.
In general, a Baa/BBB rating is defined as "adequate capacity" to pay interest and repay principal, whereas an A rating is "strong capacity".
Moody's defines Baa as moderate credit risk, of medium grade and which might possess certain speculative characteristics. A is defined as upper-medium grade and as such, low credit risk.
The relative progress required to get from Baa1 to A3 is thus far more than that to get from Baa2 to Baa1.
Other than the socio-economic factors, where we know progress is slow, the key quantitative factors are fiscal and external liquidity ratios.
Moody's sounded a note of caution on the budget deficit, although this has more relevance for South Africa's local currency rating.
Given that South Africa has a low external debt ratio and does not fund much of its deficit offshore , it is not deemed as critical for the foreign currency rating as it might be in some other countries.
However, widening fiscal deficits do raise the bar for a move to an A-grade foreign currency rating.
While South Africa has made huge progress in building reserves, we need to be realistic. Reserves are still low and they are not the only factor that matters. South Africa's external debt to gross domestic product ratio is low for Baa, but not as low as many A countries.
The debt service ratio, which is also important, is worse than the Baa median and might come under pressure from the strain seen on exports.
Moody's external vulnerability indicator has improved markedly, to come in line with other Baa countries, but is still significantly worse than the median A ratio.
Thus, while South Africa has made good progress on a number of issues, this is consistent with current ratings rather than an upgrade to A.
- Chantal Valentine is an economic and fixed-income strategist at Coronation Fund Managers