Transnet. Picture: SUNDAY TIMES

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THE stakes may never have been higher as ratings agency Moody’s enters the country this week for its annual review of SA’s creditworthiness, upon which much of the country’s immediate future depends.

The government and its policies may be the target in chief, with SA’s sovereign credit rating having been placed under review last week for a possible downgrade to just one click above junk status — a measure that would bring Moody’s in line with two other influential agencies, Fitch and Standard & Poor’s. But that is only part of the story.

Along with 11 other regional and local government entities, freight and logistics group Transnet will also have its standing scrutinised.

Moody’s placed state-run entities under review due to the links between their credit profiles and SA’s economic prospects and weakening credit profile. As it did with Eskom, which was placed under review for a downgrade last week, the rating comes at a critical time for Transnet.

Transnet is in the middle of rolling out its market demand strategy — a recapitalisation programme to expand and modernise the country’s rail and ports infrastructure. The strategy, a R300bn investment in ports and rail, was initiated in 2012 and was intended to be implemented over the next seven years.

However, SA’s economic growth slowed to levels lower than forecast (at a 1.3% growth in gross domestic product last year) as commodity prices slumped, and Transnet had little choice but to extend the plan to 10 years at an investment of R340bn-R380bn.

Transnet is rated Baa2 by Moody’s, with a baseline credit assessment (BCA) of baa2. Investors use the BCA as a gauge of the financial health of the company, as viewed without any support from the state,

RMB credit analyst Elena Ilkova says it was normal for a number of state entities to also be placed under review when the sovereign’s credit rating is under review for a downgrade.

Other state entities on review to be downgraded include the Development Bank of Southern Africa, the Industrial Development Corporation, the Land Bank and SA’s five major banks.

"So it’s not about Transnet, but it’s about the government," says Ms Ilkova.

Stanlib co-head of fixed income Victor Mphaphuli says, in equivalent terms, Moody’s rating of SA at Baa2 is one notch higher than the BBB rating given by Fitch Ratings and Standard and Poor’s. "Given the activity seen from other ratings agencies, it follows that Moody’s may want to catch up, particularly in an environment where there has not been much improvement in terms of fiscal matrices," says Mr Mphaphuli.

He says in general the risk profile of a number of state-owned entites has changed and the cost of funding will be slightly higher. "But the market will have already priced that in and will fairly reflect the activity."

Moody’s announced on Friday that it had placed all ratings pertaining to Transnet on review for a downgrade.

In addition, it announced that it had placed 11 regional and local governments under review including the country’s four metros in Tshwane, Joburg, Ekurhuleni and Cape Town. Also under review for a downgrade is the South African National Roads Agency Limited.

According to Moody’s, the review of Transnet’s rating would "assess" the credit implications for the state-owned freight and logistics company after the conclusion of the review of the sovereign. The review would also look at government’s support and dependence assumptions around Transnet, as well as the effect of a weakening economic environment on the parastatal.

Moody’s said factors that would affect Transnet’s standalone credit profile were the execution of its capital expenditure programme, while also maintaining a conservative financial discipline, as well as potential increases in debt for infrastructure. The tariffs Transnet would be able to charge to recover its infrastructure spending were also a factor.

"Moody’s expects that Transnet will only commit to capital expenditure that will earn the company a sufficient return on assets to support its funding requirements," it said.

Transnet spokesman Mboniso Sigonyela says the company has noted Moody’s decision to place it under review and will await the ratings agency’s final decision.

"The review was prompted by the agency’s review of the sovereign. It is not due to Transnet’s financial position," Mr Sigonyela says.