SA is unlikely to regain investment grade status from S&P Global Ratings if there is no surge in economic growth, placing pressure on newly-elected President Cyril Ramaphosa to deliver on reforms.
On Friday night, S&P kept the country’s long-term foreign-currency rating at BB, while the long-term local-currency rating was held at BB+, both below investment grade. It maintained a stable outlook on expectations that the government will focus on reforms to revive the economy.
“The stable outlook reflects our view that, with the elections now over, the SA government will pursue some reforms and attempt to improve economic growth and try and contain fiscal deficits,” S&P said.
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However, it said it could only raise the ratings “if economic growth and fiscal outcomes strengthen in a significant and sustained manner beyond our current projections”.
The pronouncement came a day before Ramaphosa’s inauguration.
The cabinet became bloated under former president Jacob Zuma’s administration that placed pressure on public finances.
Ramaphosa has vowed that his cabinet, which is expected to be announced on Monday, will revitalise the economy by fixing state firms, easing policy uncertainty and attracting foreign investment.
This would be the worst performance since the first quarter of 2018. And it would underline the scale of the economic challenges faced by Ramaphosa
— Capital Economics economist John Ashbourne
However, S&P said they are expecting the government to continue shying away from difficult and contentious issues such as widespread staff retrenchments in state-owned enterprises, and tackling the labour unions.
“Overall reform efforts are likely to be lacklustre and unlikely to be significant enough to drive strong GDP growth,” it said.
SA also faces a contraction in the first quarter due to the country’s most severe bout of power cuts. S&P only expects growth of 1% in 2019, climbing to 1.9% over the medium-term that will make regaining investment grade difficult.
“This would be the worst performance since the first quarter of 2018. And it would underline the scale of the economic challenges faced by Ramaphosa,” said Capital Economics economist John Ashbourne.
SA has failed to bring about 2% growth since 2013. In 2018 , SA entered a recession for the first time since the global financial crisis after contractions in the first two quarters of the year.
“Our ratings on SA are constrained by the weak pace of economic growth, particularly on a per-capita basis, as well as its large and rising fiscal debt burden, and sizable contingent liabilities,” S&P said.
The Treasury said the main focus for the government is to regain investment grade.
“This will be achieved by enhancing policy certainty and credibility, implementing growth-enhancing economic reforms, lowering the debt burden as well as restoring good governance and financial stability at public institutions and state-owned companies, specifically Eskom,” the Treasury said.
However, the credit rating agency issued a stark warning that it could lower the ratings if SA continues to experience higher expenditure pressures, contingent liabilities manifest from Eskom in particular, and if the economy weakens. It also warned of a downgrade if the rule of law or property rights are infringed on.
A fall further into junk territory would increase the country’s cost of borrowing.
“It is early days after the elections; the jury is still out on how fast and decisive Ramaphosa will act on much-needed structural reforms and how soon low confidence levels among businesses and households will start to turn positive,” NKC analyst Jee-A van der Linde said.
S&P was the first of the big three ratings agencies to react when Zuma fired respected finance minister Pravin Gordhan in a surprise cabinet reshuffle on March 31 2017. S&P cut SA’s foreign-currency bonds to junk status three days later. Fitch Ratings followed suit four days after S&P.
S&P left SA’s local currency debt, which accounts for about 90% of government bonds, at investment grade until November 2017.
Moody’s Investors Service is the only major ratings agency that has not already downgraded SA’s sovereign debt to subinvestment grade. SA’s debt is rated at Baa3 by the agency, one notch above junk status, with a stable outlook.
Earlier in May , Moody’s sounded a warning to the incoming cabinet to implement reforms to avoid a downgrade to junk status.
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