Ratings agency S&P Global unexpectedly upgraded its outlook on SA’s credit rating from stable to positive in May 2022. Now it has unexpectedly downgraded the outlook back to stable again.
S&P’s timing late on Wednesday night was a surprise given that the agency was scheduled to update its rating only in May. But the direction of the change was not. The other ratings agencies could follow S&P’s lead by using the outlook to sound warning signals in coming months, even if they do not cut the rating itself.
That might not matter so much in a friendly global environment, in which investors were willing to take on plenty of emerging market risk. But with the world becoming more hostile and SA becoming more vulnerable to global capital flows, it could matter a lot.
It is now almost exactly three years since SA was finally junked by the last of the three major agencies, Moody’s, as we headed into hard lockdown. Further downgrades followed through 2020 as the economy and the public finances crashed, with Moody’s taking SA down two notches below investment grade and Fitch and S&P taking us down to three below.
The tide only started to turn at the end of 2021, when a faster than expected economic recovery and better than expected fiscal numbers prompted first Moody’s and Fitch to upgrade their outlooks from negative to stable, and then S&P to revise its outlook from stable to positive. The commodities boom was a big factor in S&P’s revision, which is why few expected it to last.
Now the agency has ended a stretch of relative ratings stability for SA. With all that has happened in SA in recent months, it is hardly surprising it did not wait until May. Its concerns, and those of the other agencies, are at least three. Growth, and the absence of growth-boosting reforms, are one. S&P’s rating committee would have made its latest decision well before Wednesday night, but it may not be coincidence that SA’s worse than expected GDP number triggered the announcement.
Economists are still trying to find out why the finance sector performed so unusually badly that it was the biggest factor in the fourth quarter’s 1.3% decline. But with high-stage load-shedding becoming persistent for the first time, nobody had expected a particularly good quarter — and now everybody is revising their forecasts downwards. S&P is probably among the optimists now, with a forecast of 1% for 2023 (from 1.5% previously) rising to an average 1.7% in 2024 to 2026, with downside risks.
SA has failed to capitalise on the commodities boom, the agency points out. And reading between the lines it has clearly stopped even trying to believe that the government’s energy reform measures will end the electricity crisis anytime soon. Then there are the public finances. S&P again flags the risks posed by Eskom and other state-owned enterprises to the economy and the fiscal position.
Like the other agencies, it notes the R254bn debt relief package for Eskom and says it is “in line with our previous expectations”. But it is hard to say whether any of the ratings agencies are exactly pleased with the structure of the bailout, or convinced that it will work. In postbudget reports they have all listed the various conditions and delicately raised the question of what happens if Eskom does not meet these.
They have not touched on the question that has been extensively and heatedly debated in the oped pages of Business Day recently. This is about the accounting treatment of the bailout — with the Treasury moving it from the spending to the debt side of the fiscal accounts. The issue is not just a technical tiff between economists, which is no doubt why it has been so heated. It matters because investors and rating agencies have long trusted the Treasury to be transparent and consistent and ethical in its accounting: any suggestion that it might become a little too creative would not be good for ratings. Which is why the silence from the ratings agencies is good. S&P does, however, flag as concerns all the other risks to spending and to revenue.
Greylisting
Added to this is a new concern: SA’s recent greylisting, which, says S&P, “could weigh on government borrowing costs and raise financial transaction and compliance costs for the economy and trade flows”. The agency emphasises greylisting is not a risk to SA’s credit ratings. But for investors and for rating agencies it surely puts question marks over the institutional strengths that have long been one of the few rating positives SA could rely on.
S&P’s language on the institutional framework in this week’s report is a striking contrast to that used in 2022 when it upgraded the outlook: last year’s “strong checks and balances” have become this year’s “reasonably strong checks and balances”. Like last time, it points to President Cyril Ramaphosa’s efforts to strengthen various institutions, but this time it adds “with mixed results”.
S&P is altogether more lukewarm than it was on SA, and in a context in which SA’s deteriorating balance of payments position makes it far more dependent on foreign capital inflows. The current account of the balance of payments — which reflects trade flows as well as dividend and interest flows and tourism payments in and out — has shifted from surplus to deficit, which means SA needs potentially substantial capital inflows to finance that deficit.
Worse than expected current account figures from the Reserve Bank this week suggest the current account deficit might well reach a risky 3% of GDP in 2023. The slide into deficit and the prospect that SA may not be able to access the capital inflows it needs had already helped to weaken the rand to near-Covid-19 lows. This week’s hawkish comments from US Federal Reserve chief Jerome Powell have done further damage to risky assets and emerging markets generally.
In this kind of risk-off context investors differentiate more than usual between emerging markets. Which is one of the reasons ratings matter even more than usual. SA is already in junk status so it might not seem to matter how far into junk we are. But even in good times international investors look to ratings as a guide to the relative riskiness of countries. In bad times, that differentiation is even more of a factor in investment decisions.
With load-shedding, low growth and greylisting already weighing on perceptions of SA, negative rating actions simply add to the woes SA has brought upon itself.
• Joffe is editor at large.
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