S&P confirms SA's ratings and maintains a positive outlook

Standard & Poor’s maintained South Africa’s credit ratings unchanged on Friday night. Its outlook remains “positive” implying that the next step could be an upgrade.

While load shedding and rail problems are weighing on the economy, the US credit rating agency believes that government interventions to increase private sector activity and reforms at some key state-owned enterprises will support stronger growth over the next two to three years.

“A flexible currency and deep capital markets, alongside South Africa’s net external creditor position, will help cushion rising risks tied to a slowing global economy, in our view.”

However, it cautioned that, while higher-than-expected tax revenue has helped the government’s finances this year, risks remain, including public sector wage increases, further extensions of the Social Relief of Distress (SRD) grant, and the transfer of Eskom’s debt.

To relieve financial pressure on Eskom, the government has agreed to assume between one-third and two-thirds of its R400 billion debt. Details will be provided in the February Budget.

S&P has “slightly” raised its fiscal forecasts through 2025 to reflect higher revenue growth, but it expects spending to exceed official projections, leading to an increase in overall debt. It forecasts that general government debt will rise to nearly 79% of GDP by 2025, up from 71% now.

It did, however, add that South Africa’s monetary flexibility, freely floating exchange rate, and deep financial markets are significant credit strengths.

Foreign investors own 26% of South African government bonds, down from 40% in 2017.
“The absorptive capacity of the country’s deep capital markets supports the government’s funding structure, in our view, and can typically help counterbalance rapid sell-offs by foreign investors.”

South Africa, unlike most emerging markets, has a strong net asset position, according to S&P. This is due, in part, to the fact that the majority of its debt is in rand rather than foreign currency. This acts as a barrier against external pressures.

“We could raise the ratings if growth in economic output and fiscal consolidation continue on a sustained basis, against a backdrop of structural and governance reforms and supportive external sector dynamics.”

However, S&P warned that its outlook could be downgraded if government finance pressures increase – or if a more severe global economic downturn, particularly in China, hits South Africa.

“We could also revise the outlook to stable if the expected debt transfer from Eskom to the sovereign balance sheet significantly weakens the sovereign’s fiscal trajectory without addressing operational and financial shortcomings at the public utilities company.”

According to S&P, economic growth will slow but remain higher than pre-pandemic levels.

It is noted that the ANC’s electoral conference in December 2022 will determine the top six leadership positions in the party, which could determine the pace of reform implementation, including the Zondo Commission report on state capture.

“Our institutional assessment also reflects the reasonably strong checks and balances embedded within South Africa’s institutional framework, which includes a constitutionally independent judiciary, an independent central bank, and largely free media. Following past years of weakening state institutions and misuse of public funds, the current administration under President Ramaphosa and the courts have tried to strengthen various institutions – such as the tax revenue authority (South African Revenue Service), GREs [government related entities], and the national prosecuting authority – and pursue accountability.”

The possibility of South Africa being greylisted next year could result in greater portfolio outflows as well as higher financial transaction and compliance costs for the economy. S&P anticipates that South Africa’s net external asset position and deep domestic capital markets will help to mitigate some of the impact.

It reaffirmed South Africa’s sovereign credit ratings of ‘BB-/B’ in long and short-term foreign currency and ‘BB/B’ in long and short-term local currency. South Africa’s ratings have remained in “junk” territory – below investment grade – since 2017.

The National Treasury said in a statement that it had taken note of the S&P decision and reiterated that its fiscal strategy had prioritised sustainability and debt stabilisation while increasing spending in areas that would promote economic growth, such as security and infrastructure. It also aimed to reduce fiscal risk “through targeted support to key public entities and build fiscal buffers for future shocks.”

Moody’s was also supposed to update South Africa’s credit rating on Friday, but no new rating was issued.