UPDATE 2-Moody's keeps South Africa at investment grade, changes outlook to stable

(Adds Treasury response)

JOHANNESBURG, March 23 (Reuters) - Ratings agency Moody’s on Friday kept South Africa’s credit rating unchanged and revised the outlook to stable from negative, saying previous weakening of institutions was gradually reversing, supporting economic recovery.

In a swift response, the Treasury welcomed the decision, but acknowledged the warning by Moody’s that promises to improve political and policy uncertainty were essential in holding on to the investment grade rating.

Moody’s rates Pretoria’s debt at Baa3, the lowest rung of investment grade.

A cut to junk by Moody’s would have seen South Africa removed from Citi’s influential World Government Bond Index (WGBI), and could trigger up to 100 billion rand ($9 billion) in selling by foreign investors.

South Africa has however seen a return of sorely needed investor confidence since President Cyril Ramaphosa replaced scandal-plagued Jacob Zuma, who resigned in mid February on the orders of the ruling African National Congress party.

Moody’s said the recovery of institutions in Africa’s most industrialised economy would, if sustained, kickstart the economy, along with a stabilization of fiscal strength.

“The confirmation of South Africa’s ratings reflects Moody’s view that the previous weakening of South Africa’s institutions will gradually reverse under a more transparent and predictable policy framework,” Moody’s said in a statement.

The Treasury said in a statement that Moody’s reprieve showed that steady progress in meeting the objectives set out in Ramaphosa’s State of the Nation Address in February was key for the country’s economic and fiscal prospects to be sustained.

“To improve South Africa’s investment and economic prospects, the government continues to work diligently on practical steps to provide the necessary policy certainty,” the treasury said.

South Africa’s economic growth has shown signs of recovery, expanding by a surprise 3.1 percent in the fourth quarter, the highest rate since the second quarter of 2016.

S&P Global Ratings downgraded South African local currency debt to ‘BB+’ or “junk” territory in November, citing a deterioration in the country’s economic outlook and public finances.

In April, Fitch downgraded the rating to sub-investment grade after Zuma abruptly fired Pravin Gordhan as finance minister, saying it would likely result in a change in economic policy direction. It kept both local and foreign currency credit ratings unchanged at BB+ in November, with a stable outlook. ($1 = 11.7353 rand) (Reporting by Mfuneko Toyana Editing by James Macharia)