Daily Maverick
Dailymaverick logo

Business Maverick

Business Maverick, South Africa

Rating agency S&P Global revises SA’s outlook to positive, but still less optimistic than Treasury

Rating agency S&P Global revises SA’s outlook to positive, but still less optimistic than Treasury
Neesa Moodley
By Neesa Moodley
17 Nov 2024
Facebook
1
Fewer than six months after the government of national unity was formed, S&P Global has revised South Africa’s outlook to positive from stable and affirmed the sovereign long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively.

A BB- long-term foreign currency debt rating means South Africa's debt is considered speculative, or "junk," by global standards. Although it's still investable,  there's a higher risk of the government struggling to repay its debt compared to more stable countries. Investors may demand higher returns to compensate for this risk.

The "BB" long-term local currency debt rating is slightly better than the foreign currency rating, suggesting the government’s debt in South African rand (its own currency) is a bit less risky than debt in foreign currencies like the US dollar. However, it's still considered to be in the "speculative" category.

The good news is the improvement in the outlook from stable to positive.

National Treasury welcomed the news of the improved outlook over the weekend. “The positive outlook reflects the agency’s view that increased political stability following the May 2024 general elections and impetus for reform could boost private investment and GDP growth. S&P further states that since the formation of the new broad coalition of 11 political parties under the government of national unity (GNU), debt yields and portfolio inflows have improved, leading to easing financing conditions and currency strengthening,” Treasury said.

According to S&P, despite the government publishing weaker fiscal projections in the most recent Medium-Term Budget Policy Statement compared with those published in the February 2024 Budget Review, the agency has recognised that South Africa’s growth prospects have improved under the GNU, as structural reforms are being implemented while the commitment to fiscal consolidation remains.

Wealth strategist Izak Odendaal of Old Mutual says this is the first step towards a rating upgrade and is therefore encouraging. “S&P currently rates South Africa’s foreign currency debt at BB-, which is three notches below investment grade. Returning to investment-grade status will therefore take several years and will require evidence of progress on economic growth and fiscal consolidation,” he told Daily Maverick.

More conservative on growth, less optimistic on debt


S&P has forecast growth averaging 1.4% over the next three years, which is more conservative than Treasury’s forecast of an average 1.8% from 2025 to 2027.  

S&P Global is also less optimistic on debt stabilisation, projecting the debt ratio to rise to 80% by 2027, while Treasury’s projections place debt at 75% of GDP by 2027.

“On both counts, there is room to surprise to the upside. Other ratings agencies are likely to also become more optimistic on South Africa and move towards ratings upgrades. The key thing is ongoing delivery on reform, with Transnet being particularly important both to improve the logistics performance of the economy through partnerships with the private sector, and as a risk to the fiscus given its weak financial position,” Odendaal cautions.

In the medium-term budget, the government indicated that it aims to keep spending in check to narrow its general government deficits toward 3.2% of GDP in fiscal 2027. However, S&P says it expects larger deficits “largely because of potential higher wages, given a track record of difficult negotiations with unions and higher transfers to SOEs because of ongoing liquidity strains at several SOEs, including Transnet”.

Read more: Parliament on the verge of securing a new pay structure for entry-level workers as public servants threaten to strike

However, the ratings agency has lowered its forecasts for off-budget spending for SOEs compared with its previous review, saying that “we think the government is unlikely to provide support similar to the Eskom debt relief package to other SOEs”.

Treasury says the government’s strategy focuses on achieving fiscal sustainability, supporting economic growth and critical social services, and addressing significant fiscal and economic risks. 

Other ratings agency views 


In September 2024, Fitch affirmed South Africa’s long-term foreign and local currency debt ratings at BB- and maintained the stable outlook. According to Fitch, South Africa’s credit rating is constrained by several factors, including low real GDP growth, high poverty and inequality levels, a high government debt-to-GDP ratio, and a rigid fiscal structure that hampers deficit reduction. DM

Categories:

Tags: