SA business leaders push for return to investment-grade rating

SA business leaders have mounted a co-ordinated push to restore the coveted investment-grade credit rating, making what Sim Tshabalala described as “strong, detailed and fact-based arguments in favour of an upgrade” in a recent meeting with ratings agencies.

The comments by Tshabalala, a Soweto-raised business leader who is emerging as one of the most high-profile advocates pressing the case that Africa pays inflated costs for capital, come as the worst-case scenarios outlined by the likes of Moody’s, Fitch and S&P Global fail to play out since SA tumbled into junk territory in 2017.

The SA delegation — backed by the influence of Business Leadership SA, a group representing CEOs of the country’s biggest companies — argued that public finances were improving. They pointed to two main signs: consecutive years of primary budget surpluses and a debt-to-GDP ratio that was turning out better than expected.

“For the first time in 15 years, SA has delivered back-to-back primary budget surpluses. Government debt, which S&P had previously forecast to reach 84.7% of GDP by 2023, came in roughly 10 percentage points lower that year, in the mid-70% range,” Tshabalala told Business Day.

Budget stability signs

According to Wednesday’s medium-term budget policy statement (MTBPS), “it will stabilise at 77.9% of GDP this year and decline in the following years. Further, the debt stock is long-dated, predominantly rand-denominated (around 90%), and supported by deep domestic capital markets, providing resilience against external shocks.

READ IN FULL | Enoch Godongwana’s medium-term budget policy statement

“The composition of government spending is also improving, with a larger share of spending being allocated to infrastructure.”

Other positives that Tshabalala said warrant a sovereign credit uplift are Eskom’s energy availability factor trending upward and private generation investment accelerating.

He also said the opening of the rail network to 11 private operators and new port concessions are lifting throughput, with freight volumes already up 10-million tonnes, and an additional 20-million tonnes expected by 2026. Developments are directly addressing the very bottlenecks long cited as constraints to growth and are already improving production.

Upgrade bets rise

US banking majors Goldman Sachs and Bank of America have said they expect S&P to upgrade SA’s sovereign ratings when it announces its decision over the weekend.

Standard Bank and Tshabalala have led the charge in calling out ratings agencies for overestimating Africa’s risk profile, which burdens the continent with high debt costs. A 2023 study by Africa Practice reveals the continent could be losing up to $4.2bn in interest payments on its loans, primarily because of this inflated risk assessment.

In recent years, numerous African countries have seen sovereign debt rating downgrades, including Egypt, Nigeria, Kenya, Namibia, Uganda, Morocco, Senegal, Ghana, Zambia and Botswana. In Ghana and Zambia, sovereign debt was restructured after defaults.

Standard Bank, Africa’s largest lender by assets, is present in 21 countries on the continent, with more than 40% of its earnings coming from outside SA.

Governance indicators improve

Tshabalala also pointed to the overall quality of governance, has also significantly improved, with SA’s performance on the World Governance Indicators’ Rule of Law index having improved sharply since 2020.

“SA has regained its status as a ‘liberal democracy’ in the latest V-Dem Institute rankings, therefore returning to the top quartile of countries in terms of political openness and good order. Just last week, SA exited the FATF greylist, beating the median exit time,” he said.

“Leading SA political analysts expect the current policy direction to be maintained at least over the medium term.

“For instance, Standard Bank’s top-rated political analyst currently assigns a 65% probability to the government of national unity (GNU) continuing in its present form and a 25% probability to a ‘GNU-lite’, which would maintain largely the same policy direction as at present.”

Sisamkele Kobus, a fixed-income analyst at Ninety One, said after years of policy drift and fiscal uncertainty, the combination of tighter monetary discipline, targeted savings and transparent governance reforms represents a turning point.

If the government sustains this momentum, it will not only bolster the case for a sovereign ratings upgrade but, more importantly, lay the groundwork for stronger, more inclusive growth.
— Sisamkele Kobus, fixed-income analyst at Ninety One.

“For investors and citizens alike, it offers cautious optimism that SA is moving, at last, from reform talk to reform action,” Kobus said. “If the government sustains this momentum, it will not only bolster the case for a sovereign ratings upgrade but, more importantly, lay the groundwork for stronger, more inclusive growth.”

With corporate lending having risen 8.3% year on year across key sectors of reform, including energy, logistics and water projects, Standard Bank expects consumer lending to follow within the next year.

Tshabalala said SA attracted over R129bn in bond net inflows this year alone, and equity markets have re-rated strongly.

Scrutiny of ratings agencies

A report commissioned by the late Pope Francis, released in June, called for the reform of private credit ratings agencies, saying they exert “outsized influence on sovereign debt dynamics”. The report said that while investors need to know the risks associated with different investments, the evidence of the accuracy of credit rating agencies remains weak.

S&P Global Ratings president Yann le Pallec countered negative perceptions on a recent visit to Joburg. He said that while S&P welcomed public scrutiny, ratings were just one input into investors’ pricing of African debt.

Tshabalala said it was concerning, however, that statistical analysis (by Standard Bank and others) has shown that the major ratings agencies tend to assess African countries as riskier than they actually are.

“Standard Bank’s research had found statistically significant evidence that the major agencies rate Sub-Saharan African issuers up to four risk grades worse than levels implied by fundamentals, and that the expected default rates implied from ratings materially overstate observed default rates. It would follow that the several African sovereigns ought, in fairness and accuracy, to be upgraded,” Tshabalala said.

“More positively, it is encouraging that the major agencies have been receptive to our points both about SA’s economic performance and trajectory and about the need to improve the accuracy of their ratings of African economies.”