Even as S&P Global Ratings joined bigger rival Moody’s Investors Service in raising the outlook on SA’s rating, economists warn that there is no guarantee of upgrades to the country’s junk-rated sovereign debt in the next two years.
On Friday, S&P lifted the outlook on SA’s sovereign credit rating to positive and highlighted SA’s favourable terms of trade. Terms of trade compare the price of a country’s exports versus its imports.
The decision by the agency, which rates SA’s debt three levels below the highly coveted investment grade, also reflected the government’s improving fiscal metrics as it largely kept its word on keeping borrowing in check and benefited from higher commodity prices. SA’s debt to GDP ratio — a measure of the country’s financial health watched by ratings agencies — is expected to peak at about 75%, a long way from previous estimates of 95%.
While S&P cautioned that fiscal deficits will remain elevated in the short term, they will gradually narrow to 5% of GDP in 2025, possibly reflecting the agency’s uncertainty about the level at which the government will settle with unions, which are demanding a 10% wage increase, how it will respond to growing pressure to make the social relief of distress grant permanent and the risk the government could be forced to provide cash injections to state-owned enterprises.
Absa Capital fixed-income sales trader and macro strategist Mamokete Lijane said the move shows SA’s administration is “doing the right things” and ratings agencies took notice.
“It’s almost like a rubber stamp to this idea that SA might have eventually found itself on [a] stable footing,” said Lijane.
Senior economist at the Efficient Group Francois Stofberg agreed: “It’s a positive sign that we’re moving in the right direction. I know to South Africans it doesn’t always feel like it.”
He said a future upgrade is not certain and Lijane said: “It’s not something you should take for granted.”
She added that the decision marked a turning point “after a decade of complete erosion” of institutional stability and policy confidence. To her, it shows policymakers are no longer doing the “absolute wrong things” and have “stopped messing up”.
The decision to keep SA’s ratings where they were — BB- for foreign currency and BB for local currency — and to improve the outlook means it is extremely unlikely that the next move will be a downgrade.
Ratings are vital to the government as they influence investors’ perceptions of its ability to meet its obligations, and its borrowing costs in the market.
On Friday, the Treasury noted that S&P took into consideration SA’s implementation of key reform targets to expedite structural reforms and that more tax revenue than expected had been gathered.
Among features inspiring S&P’s confidence were SA’s current account surplus, deep and flexible financial markets, sound banking sector, and prudent monetary policies — which are expected to cushion SA from external funding risks posed by rising inflation and global tightening.
Nedbank chief economist Nicky Weimar found the upgrade similarly encouraging, as the decision reflects S&P’s positive view of SA’s fiscal and external vulnerabilities.
“The route to a rating upgrade ... rests on the government illustrating the political will to accelerate structural reforms to lift potential growth while exercising continued expenditure restraint,” she said.
Though SA’s tax revenue was reaping the benefits of an uptick in global commodity prices, which were boosted by the war in Ukraine and sanctions on Russia, it was unpredictable.
“How much longer will this resilience last? The root causes of the boost to tax revenue appear mostly cyclical and potentially temporary,” said Weimar.
The National Treasury welcomed the move, noting S&P “expects SA to post a current account surplus in 2022 for the third consecutive year, as prices for key metals and mining exports have risen significantly since the start of the Russia-Ukraine conflict”.
In early April, Moody’s Investors Service changed its outlook on SA’s rating to stable. Fitch Ratings made the same move a few months prior. All three agencies have SA debt in junk status, with Moody’s two rungs below investment grade, while S&P and Fitch have it one level lower than that.
Lijane said the “key takeaway was that it feels like that downward pressure on ratings has abated a bit”. She said any rating upgrade would be “very growth-linked” with ongoing load-shedding among the major obstacles.
“To me until that is sorted it’s very difficult to see us getting upgraded again,” Lijane said.
Weimar warned that achieving a rating improvement in future would demand political compromise and complex, not to mention unpopular, trade-offs. She said while the government was taking the right steps, she had reservations.
“We believe progress on structural reforms and fiscal consolidation will be slow. A rating upgrade is not assured and is probably some way off,” Weimar said.
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