S&P Global affirmed SA’s rating on Friday, maintaining a stable outlook that came with the country's most recent downgrade.
The decision, at its scheduled review, follows the move in April to send SA deeper into junk territory, when it cut the country’s foreign and local currency credit ratings to BB- and BB respectively. April’s downgrade was a deviation from S&P's regulated calendar and was was precipitated by the effect of the Covid-19 crisis on the economy and SA’s worsening fiscal profile.
SA is in its eighth week of one of the harshest lockdowns implemented globally to slow the spread of the coronavirus. The near halt to business activity will see the economy shrink, putting severe strain on the state’s already stretched finances.
In its review on Friday, S&P said that though the state had introduced a “proactive policy response” to the pandemic “the economic fallout will be very difficult to handle, and SA had entered the crisis from an already weak fiscal and economic position.”
The ratings agency is expecting SA's economy to shrink by 4.5%, among the more optimistic forecasts. The Reserve Bank is expecting the economy to contract by 7% while Business for SA expects GDP to shrink 10.5%, and that in a relatively optimistic scenario where government relaxes the lockdown immediately to level 2, allowing key sectors such as construction, domestic air travel and car rental services to operate.
SA's shrinking GDP and a rand that has lost about a fifth of its value means SA's citizens are getting poorer. The agency noted that GDP per capita in 2020 would fall to $4,900 (R86,306) from $6,000 in 2019.
Though unemployment levels — now at 29.1% — remain very high, the public sector unions retained their power to secure above-inflation pay increases, constraining the country's ability to rein in its budget and pursue pro-growth policies, S&P said.
“Heavy unionisation in key sectors such as mining creates an insider/outsider labour market that is inflexible and further constrains GDP growth, in our opinion,” it said in the review.
The weaker growth outlook will weigh on SA government revenues — S&P expects the budget deficit to rise to 13.3% of GDP and only a “tepid economic recovery” .
It forecasts debt to GDP to rise to 85% by 2023 — “raising questions around debt sustainability”
“Another legacy of the Covid-19 shock will likely be a far higher annual interest bill,” it said — predicting that by 2023 interest payments will consume 22% of government revenues.
The agency flagged the risks posed by the state's exposure to state-owned enterprises.
“Stress has been most extreme at SAA (SAA) and Landbank,” it said. But it warned that power utility Eskom was likely to face “near-term liquidity challenges in light of lower energy demand throughout the lockdown”.
The government has proposed a R500bn economic support package in response to the pandemic — some of which will be funded through savings and reprioritisation of the current budget. But S&P warned that some of this might prove “overly ambitious” if the virus continues to spread.
A special adjustments budget is due in June, where Treasury will lay out steps to stabilise public finances and a range of economic reform proposals needed to reignite growth.
Ahead of the review's release, Citi economist Gina Schoeman told Business Day that S&P would likely want to see what the Treasury announces in the adjustments budget before taking any further action. “What really matters from here on is what Treasury announces,” she said.
S&P's April downgrade came after Moody’s Investors Service — the last remaining ratings agency to rate SA’s debt at investment grade — finally pulled the plug at the end of March, sending SA into junk status with all three major ratings agencies.
The agency's next scheduled review is due on November 20.
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