Two of the three global ratings agencies are due to publish updates on SA on Friday evening, and while economists expect the next moves could be positive if the government holds the line on spending and speeds up reforms, any ratings actions are likely to wait until after February’s budget.
SA’s sovereign credit rating is still well into subinvestment grade territory at all three agencies, but it is not at risk of further downgrades, with all three upgrading their outlook over the past year in response to SA’s improved debt, growth and balance of payments dynamics.
S&P Global in May lifted the outlook on its rating from stable to positive, which means it could consider an upgrade to the rating itself in the coming year. Rivals Fitch and Moody’s Investors Service have a stable outlook on their ratings, after Fitch upgraded its outlook in December, citing SA’s faster-than-expected economic recovery and “surprisingly strong” fiscal performance.
Moody’s followed in April, saying SA’s fiscal position had markedly recovered from the pandemic, thanks to high commodity prices, which boosted tax revenue, and controls on spending including the cap on public sector wages.
The series of outlook upgrades has paused the long stretch of negative outlooks and downgrades that began in 2012 and culminated in March 2020, when Moody’s became the last of the three to junk SA’s rating.
But the ratings agencies will be looking to February’s budget to see whether the government can continue to push back against demands on public sector wages and higher social grants. They will also be waiting to see how the promised Eskom debt relief is to be done, before they turn better outlooks into better ratings. They will be monitoring the risk that global and domestic growth could prove weaker than expected.
Moody’s and S&P are on six-monthly schedules to issue updates, because their SA sovereign analysts are regulated by the European authorities, while Fitch, whose analyst sits in Asia, is not subject to the timetable requirement. But the fact that an agency has an update on the calendar does not mean it necessarily has to publish one.
Old Mutual economist Johann Els said he does not expect ratings upgrades anytime soon. “Maybe they will move from stable to positive after February, then all three agencies will be on positive. But they will need to see more evidence of fiscal consolidation. They will need to see more evidence of policy reform.”
Nedbank CIB fixed-income analyst Reezwana Sumad said in a recent note: “On balance, we think February’s budget becomes a live rating event, once the rating agency [S&P] can ascertain details on wages, the social relief of distress grant and Eskom’s debt solution. For the same reason, we also think that both Fitch and Moody’s are likely to defer any rating decisions until after the February budget.”
The junking of SA’s ratings has led to reduced interest among international investors in SA’s local currency bonds since 2020, with the mix of investors shifting towards more short-term, volatile bondholders. The Treasury reported this week that foreign ownership of SA’s local currency bonds had fallen to 26.2% of the total, the lowest since 2011. Foreign ownership peaked above 40% in 2018.
Moody’s, whose rating on SA is still one notch above the other two agencies, said after last month’s medium-term budget that if the government were able to deliver on its fiscal plan, the rating agency expected debt to continue to decline gradually, to 72% of GDP as early as 2025.
Eskom debt
The transfer of up to two-thirds of the Eskom debt to the government’s balance sheet had no immediate implications for SA’s sovereign rating, “because our consolidated government debt to GDP ratio already includes government guarantees in state-owned enterprises”, Moody’s said. But it cautioned that the debt transfer would not on its own resolve the maintenance and operational challenges in the energy sector.
S&P, when it changed its outlook in May, said it could raise SA’s ratings if growth were higher than it expected and “if we see continued fiscal consolidation, against a backdrop of structural and governance reforms and continued supportive external sector dynamics”. However, it warned it could change the outlook to stable again if external or domestic shocks derailed economic growth or if fiscal pressures significantly increased.
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