- Standard & Poor’s Global Ratings has affirmed South Africa’s credit rating and maintained a stable outlook – despite the deteriorating government debt situation.
- It says that while private sector power generation will boost growth from next year, Transnet’s problems will stagnate the economy.
- The agency believes the ANC will lose its majority in next year’s elections, but expects “broad policy continuity” even if that happens.
- For more financial news, go to News24 Business Front Page.
Despite South Africa’s deteriorating government debt burden, Standard & Poor’s Global Ratings has affirmed the country’s credit rating and maintained a stable outlook.
On Friday night, Standard & Poor’s announced that it had left its ratings at ‘BB-/B’ on South Africa’s foreign currency debt and ‘BB/B’ on its local currency debt unchanged.
A large increase in public sector wages, disappointing tax revenues and high borrowing costs have caused significant damage to the government’s finances this year. Standard & Poor’s now expects government debt to rise to 83% of GDP by 2026 – from its previous forecast of 79%.
Its debt projections are higher than the government’s, which stands at 77% of GDP in 2025.
Standard & Poor’s expects private sector electricity generation will likely ease South Africa’s energy shortages from 2025. While real GDP growth is expected to slow to 0.8% this year, it will be followed by a 1.6% rise on average. During the period from 2024 to 2026 with increased energy. Comes on stream.
But bottlenecks at ports and railway problems will hurt growth as exporters, especially mining companies, will be unable to take their goods out of the country. Rail volumes have fallen by more than 30% since 2018 due to Transnet’s problems.
S&P highlighted South Africa’s continuing strengths: a flexible exchange rate, an actively traded currency, deep capital markets, and a credible central bank. The Reserve Bank’s “proactive” rate hikes are credited with cooling inflation, which Standard & Poor’s expects to remain within the central bank’s target range of 3% to 6%.
The precarious finances of state-owned companies remain a concern, with Transnet’s total debt now equivalent to nearly 2% of GDP.
“It is unclear how and when the government will support Transnet to help it meet its financing needs. Discussions are ongoing, and we believe they are likely to involve a combination of guarantees and equity injections.”
But although the government’s finances are strained, deep domestic capital markets and increased concessional financing (cheap loans) from international institutions such as the World Bank, the African Development Bank and the New Development Bank (the so-called BRICS Bank) can help, Standard & Poor’s says.
Banks’ exposure to government debt has risen to 15% of total assets from less than 10% in 2015. But this level remains lower than that of counterparts such as Brazil, Mexico and Turkey.
“We believe there is still room for banks to continue absorbing additional government debt,” S&P said. Foreign currency-denominated debt remains less than 10% of the government’s total debt, limiting the influence of the volatile rand.
S&P also notes that although graylisting has resulted in a slight increase in costs for smaller financial institutions, it is unlikely to significantly impact South Africa’s creditworthiness.
The agency believes the ANC will lose its majority in next year’s elections, but expects “broad policy continuity” even if that happens.
“We can lift [SA’s credit] “If there is an improving record of effective reforms, leading to a structural boost to economic growth along with reductions in public debt and contingent liabilities,” he noted. But if reforms falter, growth worsens, and the government’s finances deteriorate, it could lead to a credit rating downgrade.
The Treasury Department said in a statement following the Standard & Poor’s announcement:
Over the next three years, the government will focus on increasing GDP growth by improving electricity provision and logistics, enhancing infrastructure delivery and restructuring the country to be efficient and fit for purpose. Fiscal policy continues to support this approach by stabilizing debt costs and debt payments. In addition, fiscal consolidation will be implemented through spending cuts, efficiency measures across the government, and moderate tax revenue measures.
Standard & Poor’s’ rating on South African debt is in line with that of credit agency Fitch, which rates South Africa as BB-.
In July, Fitch reaffirmed its rating, saying South Africa was constrained by low growth and a “modest” path to fiscal consolidation.
Moody’s rates South Africa at Ba2, which is equivalent to the BB rating used by Fitch and Standard & Poor’s, says Investec chief economist Annabelle Bishop. Fitch and Standard & Poor’s both gave South Africa a lower rating of BB-.
Bishop says risks have risen to South Africa’s ratings due to the deteriorating fiscal outlook in the 2023 medium-term budget.
“This is likely to be reflected in [credit rating] Forecasts The February budget is therefore key, especially revenue versus expenditure estimates.