S&P affirms South Africa's positive outlook

Standard & Poor's kept South Africa's credit ratings unchanged. Its outlook remains "positive", which means that the next step could potentially be an upgrade.

The US credit rating agency says that while load shedding and rail problems weigh on the economy, it expects that government interventions to increase private sector activity and reforms at some key state-owned enterprises could support stronger growth over the next two to three years.

"A flexible currency and deep capital markets, alongside South Africa's net external creditor position, will help cushion rising risks tied to a slowing global economy, in our view."

However, it warned that while higher-than-expected tax income has supported government finances this year, risks remain – including public sector wage hikes, further extensions of the Social Relief of Distress (SRD) grant, and the transfer of Eskom's debt.

Government has committed to take on between a third and two-thirds of Eskom's R400 billion debt to ease the financial pressure on the utility. Details are expected in the February Budget.

S&P has "slightly" improved its fiscal forecasts through 2025 to reflect higher revenue growth, although it expects that spending will likely exceed official projections, leading overall debt to rise. It sees general government debt rising to nearly 79% of GDP by 2025 from 71% currently.

But it added that South Africa's monetary flexibility, the freely floating exchange rate, and the country's deep financial markets are significant credit strengths.

Foreign investors now hold only 26% of South African government bonds – from 40% in 2017. "The absorptive capacity of the country's deep capital markets supports the government's funding structure, in our view, and can typically help counterbalance rapid sell-offs by foreign investors."

Debt

In contrast to most emerging markets, South Africa is in a strong net asset position, S&P notes. This is due in part to the fact that most of its debt is in rand - not foreign currency. This provides a buffer against external pressures.

"We could raise the ratings if growth in economic output and fiscal consolidation continue on a sustained basis, against a backdrop of structural and governance reforms and supportive external sector dynamics."

But S&P warned that it could downgrade its outlook if government finance pressures increase – or if a sharper global economic downturn, particularly in China, hit South Africa.

"We could also revise the outlook to stable if the expected debt transfer from Eskom to the sovereign balance sheet significantly weakens the sovereign's fiscal trajectory without addressing operational and financial shortcomings at the public utilities company."

S&P expects that economic growth will slow but remain stronger than pre-pandemic levels.

It notes that the ANC electoral conference in December 2022 will decide the top six leadership positions in the party, which could determine the pace of reform implementation, including the recommendations of the Zondo Commission report on state capture.

Independence

"Our institutional assessment also reflects the reasonably strong checks and balances embedded within South Africa's institutional framework, which includes a constitutionally independent judiciary, an independent central bank, and largely free media. Following past years of weakening state institutions and misuse of public funds, the current administration under President Ramaphosa and the courts have tried to strengthen various institutions - such as the tax revenue authority (South African Revenue Service), GREs [government related entities], and the national prosecuting authority - and pursue accountability."

South Africa's potential greylisting next year could result in sharper portfolio outflows, as well as higher financial transaction and compliance costs for the economy. However, S&P expects that South Africa's net external asset position and deep domestic capital markets could mitigate some of the impact.

It re-affirmed South Africa's 'BB-/B' long- and short-term foreign currency and 'BB/B' long- and short-term local currency sovereign credit ratings. Its ratings of South Africa have remained in "junk" territory - below investment grade - since 2017.

In a statement, the National Treasury said it had noted the S&P decision and reiterated that its fiscal strategy had prioritised sustainability and stabilising debt while increasing spending in areas that would promote economic growth, such as security and infrastructure. It also sought to reduce fiscal risk "through targeted support to key public entities and build fiscal buffers for future shocks."

Moody's was also scheduled to update South Africa's credit rating on Friday, but did not provide a new rating.-Fin24