S&P Global unexpectedly downgraded SA’s credit outlook from positive to stable on Thursday, dealing a blow to the country’s hopes of digging itself out of its junk status hole as infrastructure and deepening power outages weigh on the economy.
The agency, which rates SA debt at BB-, or three rungs below investment grade, cited the slow pace of much-needed reforms being implemented to improve governance at state-owned enterprises (SOEs).
The outlook downgrade deals a setback to the efforts of the men and women in the Treasury and elsewhere in the government to win back the investment-grade status. Still, S&P’s move — which came almost two months ahead of schedule, because of deepening power cuts — is not the start of a new cycle to sink SA deeper into junk territory.
The US-based firm had been an optimistic outlier as two other ratings agencies — Fitch and Moody’s Investors Service — kept their outlooks stable.
The country is likely to face a three-year slog to get itself removed from a global list of 25 countries deemed to have inadequate anti-money laundering and counterterrorism financing controls.
In February, the Financial Action Task Force (FATF) relegated SA to a list of countries that face increased monitoring for issues such as suspicious cross-border transactions and proliferation financing.
The latest ratings announcement follows Stats SA’s latest report on the country’s dismal economic performance.
The economic growth outlook has deteriorated in recent months as a result of the electricity crisis and logistical bottlenecks, with contingent liabilities from SOEs posing increased risk to the fiscus and to SA’s debt position. Real GDP suffered a shock contraction of 1.3% in quarter four, taking the economy back to prepandemic levels. Conditions have worsened since then, with sustained load-shedding since the start of 2023.
Africa economist at Oxford Economics Jee-A van der Linde said conditions had probably worsened, with the country having averaged stage 4 load-shedding since the start of 2023.
This could be seen in S&P’s decision to revise downwards its 2023 real GDP growth forecast to 1% from 1.5% as more than half of SA’s industries, most of them labour intensive, are still performing below prepandemic levels.
S&P warned that structurally high income inequality and extreme unemployment cannot be remedied under the current weak economic trajectory.
“With commodity price tailwinds fading and exporters struggling to get their goods to and through domestic ports, SA’s external position will deteriorate this year,” S&P said.
Placing all these issues in perspective, the agency said it expects the current account deficit to average 1.6% of GDP over the medium term and widen to 1.9% by 2026.
The agency added that while the FATF’s greylisting is unlikely to affect the country’s creditworthiness, it “could weigh on government borrowing costs and raise financial transaction and compliance costs for the economy and trade flows”.
Absa chief economist Peter Worthington said that when S&P initially put SA on a positive outlook in May 2022, he thought “it was premature” given SA’s slow reform progress, weak growth and growing public indebtedness at the time.
Old Mutual Investment Group chief economist Johann Els said the load-shedding risk for the overall economy must have weighed heavily on the decision. For ratings agencies, sustained economic growth is a big input in their process since it affects fiscal sustainability.
“I do not think it is surprising as S&P has been [an] outlier with a positive outlook relative to Moody’s and Fitch. [They] will likely stick to their stable outlooks,” Els said. “I do not expect any further downgrades from the other two agencies with regard to the outlook.”
The budget presented a move towards substantially less fiscal risk, with a sharp reduction in the debt ratio and a primary surplus for the first time in 15 years, which meant the country was no longer borrowing to pay interest on debt, he said.
But Els warned that all three ratings agencies would watch progress with load-shedding reductions, wage negotiations and the October 2023 medium-term budget policy statement.
“If all three areas show signs of a continued move in the right direction, they will likely consider upgrades of their respective outlook statements from stable to positive. This is thus not the renewed start of further ratings deterioration,” he said.
Van der Linde is less optimistic. “SA faces an economic mess. The domestic infrastructure failures continue to undermine growth ... and with external conditions becoming less favourable, SA can no longer rely on another global upswing in commodity prices,” he said.
Even though S&P forecasts government debt will increase to 78.7% of GDP in 2026 from 71.5% last year, he added: “We continue to believe that government debt will stabilise at higher levels of around 80% of GDP”.
Electricity shortages
Stanlib chief economist Kevin Lings said revenue was at risk from the electricity shortages. Government expenditure faces slippages related to potentially higher wage settlements and transfers to SOEs, and the possibility that the social relief of distress grant could become permanent over the medium term.
Ratings agencies did not like to keep a directional outlook in place for too long, especially with subinvestment grade credits, Worthington said. “So given the big negative impact the intensified load-shedding will have on our growth prospects, it is hardly surprising that S&P removed the positive outlook at this juncture.”
Nedbank senior economist Isaac Matshego said S&P’s outlook revision suggested prospects of a downgrade had risen.
“But we would expect the agency to revise it to negative and put it under review first, which could be the case because the quarter four GDP numbers are a shocker,” he said. “Remember that [2023] quarter one GDP numbers come out in June, a few weeks after S&P releases its semi-annual ratings review.”
In response, the Treasury said several reforms were under way to improve the transport sector — freight rail in particular — and it was working on fixing Eskom’s debt.
The government was taking urgent measures to reduce load-shedding in the short term and transform the sector through market reforms to achieve long-term energy security, it said.
With Nico Gous
Correction: March 10 2023
In a previous version of this article, it was stated that quarter one GDP number would be out in May, whereas the numbers will actually be out in June.
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