S&P Global Ratings affirms positive outlook for South Africa

S&P affirms South Africa’s ‘BB-/B’ long- and short-term foreign currency and ‘BB/B’ long- and short-term local currency sovereign credit ratings.

S&P Global Ratings, the international credit rating agency, has affirmed its ‘BB-/B’ long- and short-term foreign currency and ‘BB/B’ long- and short-term local currency sovereign credit ratings on South Africa. The outlook remains positive, it stated.

S&P highlights positive outlook

“The positive outlook reflects our expectation that a net external creditor position, a path toward fiscal consolidation and the implementation of some structural reforms could lead to an easing of fiscal and economic pressures,” said S&P.

On the upside, S&P said it 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.

Other potential scenarios

The negative scenario is that the outlook could be revised to stable if external or domestic shocks subdue South Africa’s economic growth over the forecast period, or if fiscal financing or external pressures significantly increase. This could, for example, result from a sharper global economic downturn, particularly in China.

S&P could also revise the outlook to stable if the expected debt transfer from Eskom (CCC+/Negative/–) to the sovereign balance sheet significantly weakens the sovereign’s fiscal trajectory without addressing operational and financial shortcomings at the public utilities company.

“South Africa’s economic and fiscal reforms could improve its medium-term growth and debt trajectory, in our view. We also see as fundamental credit strengths the reasonably large net external asset position, flexible currency and deep domestic capital markets that should cushion against rising external financing risks. Higher-than-expected tax revenue, relative to our expectations six months ago, will help to reduce the fiscal deficit as a proportion of GDP,” explained S&P.

However, downside risks could be exacerbated by the ongoing domestic electricity and infrastructure constraints, along with a sharper economic slowdown in China and the rest of the world. Fiscal risks emanating from ongoing wage negotiations, further extensions of the Social Relief of Distress (SRD) grant and materialization of contingent liabilities could also increase the government’s fiscal imbalances.

Growth will slow

S&P said that growth will slow but remain stronger than pre-pandemic levels. Following a rebound of 4.9% in 2021, it expects growth to reach 1.9% in 2022 and taper off to 1.7% on average over 2023-2025. Deep-rooted constraints, including record high electricity loadshedding and infrastructure bottlenecks could continue to limit medium-term economic growth.

“We forecast real GDP growth of 1.5% in 2023, with risks weighted to the downside. We assume that a broadly similar level of energy shortages will continue in 2023, handicapping agriculture, mining, and manufacturing sectors. Weaker global growth and protracted inflationary pressures could also dampen exports and domestic demand, and moderate import growth. A deeper-than-expected recession in the US and Europe, and sharper slowdown in China, could worsen the funding environment and growth outlook for emerging markets including South Africa. In a potential downside scenario, we could see growth in the country slowing 0.6% in 2023 and 1.1% in 2024,” said S&P.

In a statement, South Africa’s National Treasury said: “Government’s medium-term fiscal strategy prioritizes achieving fiscal sustainability by narrowing the budget deficit and stabilizing debt; increasing spending on policy priorities such as security and infrastructure, thereby promoting economic growth; and reducing fiscal and economic risks, including through targeted support to key public entities and building fiscal buffers for future shocks.”

In September, Sovereign Africa Rating graded South Africa at ‘Investment Grade’.