Three months ago it seemed the downbeat Sandton consensus had become too bearish on SA. There had been several positive developments, including a successful spectrum auction, the opening of bid window six for renewables, and moves by Transnet to allow private rail concessions. But the biggest improvements were on the fiscal side.
The combination of Stats SA’s statistical rebasing exercise and a R200bn revenue overrun in 2021/2022, thanks mainly to sky-high commodity prices, meant that instead of exiting the pandemic with an expected debt ratio of about 80% of GDP, it came in below 70%.
This, together with the National Treasury’s continued exercise of fiscal restraint and some evidence of structural reform by the government, has allowed all three major ratings agencies to raise SA’s credit rating outlook over the past year. Last week Fitch affirmed SA’s rating outlook as “stable”, three notches into junk. S&P Global Ratings has us on the same rung, with a “positive” outlook, while Moody’s has us rated “stable”, one notch higher.
However, a deeper reading of the ratings reviews shows they are all largely tied to SA’s near-term fiscal improvement, which reflects SA’s rebound from the pandemic and high commodity prices — factors that are starting to fade as the global environment darkens.
Concerns remain about SA’s structurally weak growth prospects, especially the state of Eskom, and the slow pace of reform. Only Moody’s expects SA’s debt ratio to stabilise over the next five years at about 75%, as promised by the Treasury, and all three ratings agencies expect SA’s growth rate to average below 2% over the medium term.
Such low trend growth is hardly suggestive of a stable long-term credit trajectory. When this is overlaid with SA’s deep social inequalities, which generate persistent spending and social pressures, it is clear that SA remains consistent with junk status despite the temporary halt in the erosion of its credit ratings — a decline that started in 2012.
Even before the allegations surfaced about President Cyril Ramaphosa’s Phala Phala burglary, and the intensification of load-shedding, it was hard to see the country moving back to investment grade. Now it is clear that the rate of SA’s decay, the erosion of public sector services and infrastructure, is accelerating.
With inflation shooting above 6%, commodity prices tumbling and more aggressive interest rate hikes on the cards, the supportive fiscal environment that has cushioned SA over the past two years is coming to an end. So, while SA is likely to get through the fiscal year riding on the coattails of the commodities boom, after that the future does not look so bright.
Much depends on whether Eskom is able to dial back load-shedding, and whether the global economy avoids recession. The odds are 50:50 on a global recession, while Eskom is in terminal decline. Only now the utility must find another R1bn to fund the 7% wage increase the president gave to illegally striking workers.
And so, in this way SA will continue down the path of least resistance. Public sector workers will be bought off with above-inflation wage increases, the bond markets kept onside with ever higher yields, and the broader population appeased with social grants. Only all of this will have to be paid for by a restless tax base that senses SA is becoming a less sustainable proposition by the day.
I was an outlier back in 2017 when I started warning that SA was fiscally unsustainable and risked becoming a failed state unless there were dramatic changes to the way the economy was managed. Many more commentators have since come around to this view, with their angst increasing in proportion to the severity of Eskom’s load-shedding schedule.
Fear about the future used to simmer just below the surface in SA; now it is right out in the open. A turnaround is still possible, but not unless we do things very differently. It would give me no pleasure to say “I told you so”.
• Bisseker is a Financial Mail assistant editor.
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