- Standard & Poor’s left South Africa’s credit rating unchanged. The outlook remains positive.
- The US rating agency warned that without addressing the issues, public sector wage increases, the extension of the SRD grant and the transfer of Eskom’s debt were risks.
- But it has upgraded its forecast for sovereign debt, saying SA’s deep capital markets and low external debt remain strengths.
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On Friday evening, Standard & Poor’s left South Africa’s credit rating unchanged. The outlook remains “positive,” meaning the next step could potentially be an upgrade.
The US ratings agency says that while load shedding and rail problems weigh on the economy, it expects government intervention to boost private sector activity and reforms at some key state-owned companies could support stronger growth over the next two to three years.
“A flexible currency and deep capital markets, as well as South Africa’s net creditor position abroad, will help cushion the rising risks associated with a slowing global economy, in our view.”
However, she warned that while government finances have been supported by better-than-expected tax receipts this year, risks remain – including public sector wage increases, further extensions of the Social Emergency Assistance (SRD) grant and the transfer of Eskom’s debt.
The government has pledged to assume between a third and two-thirds of Eskom’s R400 billion debt in a bid to ease financial pressures on the utility. Details are expected in the February budget.
S&P has “slightly” upgraded its fiscal guidance through 2025 to reflect higher sales growth, though it expects spending to likely exceed official guidance, leading to a rise in overall debt. Public debt is projected to increase from the current 71% to almost 79% of GDP by 2025.
But it added that South Africa’s monetary flexibility, floating exchange rate and deep financial markets are significant credit strengths.
Foreign investors now hold just 26% of South Africa’s government bonds – down from 40% in 2017. “The absorbency of the country’s deep capital markets supports the government’s funding structure, in our view, and can typically help offset quick sell-offs by foreign investors.” “
Unlike most emerging markets, South Africa has a strong net wealth position, according to S&P. This is partly because most of its debt is in rand rather than foreign currency. This provides a buffer against external pressure.
“We could upgrade ratings if economic output growth and fiscal consolidation continue on a sustained basis, amid structural and governance reforms and supportive external sector dynamics.”
However, S&P warned that it could lower its outlook if fiscal pressures mount – or if a more severe global economic slowdown, particularly in China, hits South Africa.
“We may also revise the outlook to stabilize if Eskom’s expected transfer of debt onto the state’s balance sheet significantly weakens the state’s fiscal trajectory without addressing the operational and financial shortcomings of the public utility.”
S&P expects economic growth to slow but remain stronger than before the pandemic.
She notes that the December 2022 ANC election conference will decide the top six leadership positions in the party, which could determine the pace of reform implementation, including recommendations from the Zondo Commission’s report on state conquest.
“Our institutional assessment also reflects the fairly strong oversight mechanisms embedded in South Africa’s institutional framework, which includes a constitutionally independent judiciary, an independent central bank and largely free media. The current government of President Ramaphosa and the courts have attempted to overhaul various institutions.” – such as the South African Revenue Service, GREs – to strengthen [government related entities]and national law enforcement – and pursue accountability.”
South Africa’s potential greylisting next year could lead to greater portfolio outflows as well as higher financial transaction and compliance costs for the economy. However, S&P believes South Africa’s net external asset position and deep domestic capital markets may mitigate some of the impact.
It reconfirmed South Africa’s BB/B rating for long and short term foreign currencies and BB/B for long and short term local currency government bonds. His ratings for South Africa have remained in junk territory – below investment grade – since 2017.
In a statement, the National Treasury said it took note of S&P’s decision and reiterated that its fiscal strategy had prioritized sustainability and debt stabilization while increasing spending in areas that would boost economic growth, such as security and infrastructure. It also sought to reduce fiscal risk “by providing targeted support to key public bodies and building fiscal buffers for future shocks”.
Moody’s was also scheduled to update South Africa’s credit rating on Friday but did not issue a new rating.