S&P Global Ratings retained SA’s credit outlook at stable on Friday while choosing not to release a report on its semi-annual review. This after an unscheduled announcement in March when it revised the outlook downwards.
Though S&P’s decision to retain the credit outlook and maintain SA’s debt at BB- was in line with economists’ expectations, it comes at a time that the country’s economic prospects have deteriorated.
SA’s inability to handle its energy crisis has led to numerous downgrades of its GDP forecasts. Economists have cited SA’s perceived connection to Russia as a potential risk to future ratings agencies’ decisions. SA has also witnessed a material depreciation in the rand since the fourth quarter of 2022.
The currency recently broke through R19/$ for the first time since 2020 and has been losing ground against the major currencies since the beginning of the year. The Reserve Bank said the rand has lost 17% to the dollar over the past year.
The Bureau for Economic Research (BER), Nedbank, Absa and Old Mutual said S&P’s decision to keep the country’s credit rating at stable is unsurprising, despite all the negative news about load-shedding and the potential impact on economic growth, because none of these factors have materially changed since early March.
BER chief economist Hugo Pienaar said given that S&P’s rating is already at subinvestment grade, the agency is comfortable for now.
“On the margin, it is positive that the ratings outlook was kept stable, suggesting that an outright downgrade is also not on the cards in the near term,” Pienaar said. “However ... this is unlikely to move the needle in terms of investor sentiment.”
Old Mutual Investment Group chief economist Johann Els told Business Day that while there are many short-term negatives in SA, ratings agencies realise that with new electricity generation coming online within the next months and years, load-shedding risk will reduce.
Grid collapse
Nedbank senior credit strategist Jones Gondo said that while the market continues to speculate about the probability of grid collapse, “we do not think S&P could anticipate this with specificity for its growth outlook, institutional assessment, fiscal position or the country’s external position more than it already has in the last rating action”.
He said S&P is likely to move its outlook to negative when it has a clearer view on outer-year forecast trends on the primary budget balance, the pace of debt accumulation and wealth levels in dollar terms.
Nedbank senior economist Isaac Matshego expects S&P to defer its rating review until the impact of load-shedding on the economy is clearer.
First-quarter GDP numbers “come out on June 6 and could show another contraction, confirming that the economy is in recession after the 1.3% contraction in quarter four last year”, Matshego said. “The impact of the weak economy on tax collections, against the backdrop of higher-than-expected public sector wage settlements, on the fiscal position will be important for the direction of the rating reviews in November 2023.”
Africa economist at Oxford Economics Jee-A van der Linde was more pessimistic. “SA dodged a bullet,” he said.
“The country faces an economic mess. Domestic infrastructure failures are undermining growth and external conditions are less favourable than they were before, which means the country can no longer rely on another global upswing in commodity prices,” Van der Linde said.
Correction: May 22 2023
This article has been altered to indicate that while S&P carried out its semi-annual review on SA, it declined to release a report thereon. It has also been corrected to indicate that the action taken in March was not a downgrade but rather an outlook change.
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