Both S&P Global and Fitch Ratings left their long-term sovereign credit ratings for SA unchanged at BB-, which is three levels below investment grade, retaining their stable and negative outlooks, respectively.
S&P, which has not changed its assessment of SA’s debt since April 2020, said in a scheduled report published late on Friday that the nation's credible central bank, flexible exchange rate and deep capital markets should counterbalance low economic growth and fiscal pressures. S&P’s comments come after Moody’s Investors Service, which rates SA one notch higher, said on May 18 that SA was at risk of a further downgrade should economic growth remain weak as the high interest rates the government was borrowing at meant debt levels would continue to rise.
“Our ratings are supported by the country's monetary and exchange rate flexibility and credible monetary policy, a well-capitalised and regulated financial sector, and deep capital markets, alongside moderate external debt— in particular low levels of external debt denominated in foreign currency,” S&P said in its ratings review.
“Our ratings are constrained by weak economic growth performance since well before the Covid-19 pandemic, particularly on a per capita basis; high economic inequality; as well as weak public finances, including high fiscal deficits, a high debt burden, and sizable contingent liabilities from weak state-owned enterprises (SOEs).”
SA received a double ratings blow in November 2020 when both Moody’s and Fitch cut the country’s sovereign debt rating deeper into junk territory just as the scale of the economic devastation caused by Covid-19 was becoming apparent. At the time both agencies maintained their negative outlook on SA’s debt with Moody’s lowering its rating to Ba2, two notches below investment grade.
S&P cautioned in its Friday report that while SA’s economy would rebound in 2021 following 2020’s 7% contraction, long-term economic growth remains negative on a per capita basis. The ratings agency also highlighted the slow pace of economic reforms as well as reforms to “governance frameworks to reduce misuse and leakage of public funds”.
S&P said it expects SA to post a second consecutive current account surplus this year, thanks to a combination of higher commodity prices that are boosting export revenue coupled with a moderate recovery in imports. Nevertheless, it estimated that the surplus on the current account, a broad measure of trade in goods and services, would narrow to about 1.2% of GDP in 2021, before reverting to a structural deficit.
“In our view, the rise in commodity prices is cyclical and will moderate over the medium term,” said S&P.
Fitch said: “SA’s external finances have weathered the pandemic well. The strengthening in gold prices and an import compression brought a current-account surplus of 2.2% of GDP, the first surplus since 2002.”
S&P said it estimated SA’s GDP per capita at about $5,700 (R80,000) in 2021, which was an improvement from about $5,000 in 2020 but still lower than the $8,000 recorded in 2011. It expects per capita GDP to remain close to $6,000 over the medium term.
S&P also warned that while SA’s recent fiscal performance is better than the targets laid out in the February 2021 budget, this trend was not strong enough to stabilise the country’s debt-to-GDP trajectory which it said would reach “just below 90% in 2024”. It also expects government’s debt servicing costs to rise above 20% of fiscal revenue by 2024.
S&P is forecasting economic growth for SA of 3.6% this year, moderating to 2.5% in 2022 and 1.3% in 2023. It expects inflation to average more than 4% this year driven by higher prices for food, electricity, oil and transport. Fitch sees the economy growing by 4.3% in 2021 and 2.5% in 2022.
Consumer inflation quickened to an annual 4.4% in April, the highest level in 14-months and up from 3.2% the previous month, a May 19 report by Stats SA showed. While that’s still below the 4.5% mid-point of the Reserve Bank’s 3% to 6% target band, analysts are beginning to factor in the possibility that the central bank may hike rates sooner than previously anticipated.
The Reserve Bank could raise its repo rate 25 basis points in November, followed by a cumulative 50 basis points in hikes in the first quarter of 2022, BNP Paribas said in a May 17 client note.
Following the release of both reports the Treasury said: “The government acknowledges the pressures the country’s credit ratings face and remains committed to addressing them. Additionally, the government is aware that it needs to fast track growth-enhancing strategies. Operation Vulindlela is a key initiative in this regard and demonstrates the government’s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability.”
Earlier, the rand reached its best level in 22 months against the dollar, breaking through R13.90. At 11.28pm it was 0.1% firmer at R13.95.
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