S&P and Fitch affirm SA’s sovereign credit rating and outlooks

S&P Global and Fitch Ratings affirmed South Africa’s long-term sovereign credit rating on Friday at BB-, which is three notches below investment grade.

While expected, the confirmation will come as somewhat of a relief for National Treasury, which is trying to make headway in getting the country out of ‘junk’ status. This, however, is expected to take years.

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In terms of outlook, S&P has maintained a “stable” view on South Africa, while Fitch maintained its outlook as “negative”.

S&P had a slightly more optimistic tone, highlighting the country’s better current economic performance. However, it warned about the slow pace of Covid-19 vaccinations as a new medium-term constraint to growth.

The ratings agency reiterated its concerns around South Africa’s structural constraints and the need for reforms.

On the local currency ratings front, S&P affirmed its “BB” assessment.

“South Africa’s near-term economic performance and current account are experiencing a cyclical uplift as a result of a combination of base effects following a large economic contraction in 2020, and improving terms of trade from higher commodity prices,” S&P notes.

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“Nevertheless, structural constraints, a weak pace of economic reforms, and low vaccination rates will continue to constrain medium-term economic growth, and limit the government’s ability to contain the debt-to-GDP ratio,” it adds.

Fitch, which also affirmed its local currency debt rating at “BB-” for South Africa, says in its latest report that the country’s rating is constrained by high and rising government debt, low trend growth and exceptionally high inequality that will complicate consolidation efforts.

“The rating is supported by a favourable debt structure with long maturities and mostly denominated in local currency. The negative outlook reflects continued substantial risks to debt stabilisation despite the better than expected fiscal outturns in the fiscal year ending March 2021,” it adds.

While the ratings agency also recognised South Africa’s current economic upswing, it is more cautious about medium- to long-term growth, citing lingering concerns around public finances and electricity shortages.

“South Africa’s economy is in the process of recovering from the sharp contraction of 7% last year and we expect growth of 4.3% in 2021 and 2.5% in 2022,” Fitch says.

“Growth will be supported by the base effect and the rise in commodity prices. However, tight public finances, and in the near term, electricity shortages will hold back growth,” it adds.

Fitch’s 2021 growth forecast for the country is slightly higher than the latest forecast by the South African Reserve Bank (Sarb), issued on Thursday.

In announcing the Sarb’s Monetary Policy Committee (MPC) repo rate decision, central bank governor Lesetja Kganyago noted that the economy is now expected to grow by 4.2% in 2021. This is up from the bank’s 3.8% growth forecast at its March MPC meeting.

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“We expect medium-term growth to remain low at less than 2%, a key rating constraint, complicating fiscal consolidation. We are not factoring in a large impact from the government’s reforms, which seem limited in scale and slow in implementation,” says Fitch.

“However, electricity supply constraints will ease, given substantial progress on enlisting independent power producers to add to capacity at scale,” it adds.

While the ratings agency notes that South Africa’s public finances have “improved substantially” relative to the last review, it says that public finances remain a rating weakness.

“The main [central government] budget deficit came in at 11.1% of GDP in FY20/21, compared with our November forecast of 15.5%. This was partly because a court upheld the government’s decision not to pay out a wage increase due from April 2020 under the 2018 three-year agreement, although an appeal by trade unions against the ruling at the Constitutional Court could still require the payment, worth around 0.7% of GDP,” Fitch says.

“However, the more important factor behind the outperformance was strong fiscal revenue, which stood 2.8% of GDP above the government’s October Medium-Term Budget Policy Statement forecast and 0.7% of GDP above the February budget projection,” it adds.

Fitch has also flagged the ongoing Covid-19 pandemic and slow vaccine rollout as risks.

Reacting to the S&P and Fitch announcements, National Treasury said in a statement that government acknowledges the pressures the country’s credit ratings face. It reiterated that it “remains committed to addressing” the issue.

“Government is aware that it needs to fast track growth-enhancing strategies…

“Operation Vulindlela is a key initiative in this regard and demonstrates government’s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability,” National Treasury added.

“Rating agencies have indicated that South Africa’s rating strengths include a credible central bank, a flexible exchange rate, an actively traded currency, deep capital markets as well as a favourable debt structure [low share of foreign currency debt] with long maturities, which should help counterbalance low economic growth and fiscal pressures,” the Treasury however pointed out.

“As highlighted in the 2021 budget, government’s fiscal strategy puts South Africa on course to achieve a sufficiently large primary surplus to stabilise debt. Over time, debt stabilisation will reduce borrowing costs and the cost of capital, attracting investment that can support the economy,” it added.