Credit agency Fitch Ratings has revised its long-term outlook for SA from negative to stable, citing improved government finances due to higher commodity prices and a faster economic recovery than anticipated from the slump in 2020.
Fitch affirmed the country’s rating at BB-, three steps below investment grade. SA is already rated junk by all three major ratings companies, losing the last investment-grade rating, from Moody’s Investors Service, in the wake of the Covid-19 outbreak in 2020.
However, the slight improvement in outlook could mean SA is less likely to face further downgrades. Ratings matter for the country because they reflect the agencies’ perception of its ability to repay its debt, which then plays a role in determining the interest charged by lenders in the bond market. SA already spends about a quarter of tax revenue on servicing debt, leaving less money for social investing.
Fitch said its change in outlook from negative to stable reflects faster than expected economic recovery and a strong “fiscal performance in the year”. SA benefited late in 2020 as a recovery in commodity prices resulted in mining companies paying higher than expected tax on the back of solid earnings.
Fitch expects SA’s GDP to rebound by 4.7% in 2021, after a 6.4% drop in 2020 that was the biggest in a century. However, it warned this wouldn’t last as the economy would be constrained by some familiar problems, including the lack of reliable electricity supply from Eskom.
The ratings outlook also improved on the back of a rebasing of GDP that left the economy 11% bigger than initially thought, translating to improved debt metrics, including the debt-to-GDP ratio, which for 2020/2021 was at 72.2%, compared to 81% based on the previous accounts data. Fitch expects a budget deficit of 7.7% for the year to March 2022, down from 10% previously.
The agency said SA’s ratings remained constrained by “high and rising government debt, low trend growth and high inequality that will complicate consolidation efforts”. It said the country’s growth potential was also limited by economic policy reforms taking too long and being “insufficient to change the growth path significantly, in our view”.
The outlook change came even as SA faces a surge of Omicron coronavirus cases, with the long-term effect on the economy still unclear.
“The pandemic continues to weigh on SA’s economic performance and remains a source of downside risk for public finances, but the likelihood of severe negative effects on creditworthiness has declined over the last year, despite the recent emergence of the Omicron variant of Covid-19 and the associated rapid surge in new cases in SA.”
In his medium-term budget policy statement in November, finance minister Enoch Godongwana committed to reducing debt and cutting spending despite pressure to increase government wages.
The Treasury said in a statement in response to Fitch’s rating that the government will “continue to demonstrate its commitment to fiscal sustainability and enable long-term growth by narrowing the budget deficit and sizeable debt”.
The Treasury also said faster implementation of structural reforms to unlock greater private sector investment, economic growth and job creation was paramount.
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