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Credit rating agencies wait on the Finance Minister’s Budget speech

Credit rating agencies are likely to keep South Africa’s sovereign debt rating at current levels as they wait to assess Finance Minister Enoch Godongwana’s Budget announcements tomorrow. Photograph: Phando Jikelo/African News Agency(ANA)

Credit rating agencies are likely to keep South Africa’s sovereign debt rating at current levels as they wait to assess Finance Minister Enoch Godongwana’s Budget announcements tomorrow. Photograph: Phando Jikelo/African News Agency(ANA)

Published Feb 22, 2022

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CREDIT rating agencies are likely to keep South Africa’s sovereign debt rating at current levels as they wait to assess Finance Minister Enoch Godongwana’s Budget announcements tomorrow.

Tomorrow’s Budget Review is expected to see fiscal consolidation forecasts kept largely unchanged from his November projections.

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Currently, all three major global rating agencies have kept South Africa’s sovereign debt below investment grade with varying outlooks, from negative to stable.

Moody’s is set to meet on April 1 and November 18, to potentially deliver a credit rating action, while S&P Global dates are May 20 and November 18. Fitch Ratings does not publish dates for South Africa’s credit action, but tends to show a similar pattern.

Investec chief economist Annabel Bishop yesterday said the Budget was not expected to see substantially improved fiscal consolidation in the near term back to pre-pandemic levels, and so fiscal health remained a drag on the economy even before the pandemic.

Bishop said the current or projected debt levels were not consistent with credit rating updates, with the credit rating agencies’ primary objective to assess the likelihood of repayment of debt.

“No credit rating upgrades are expected as a result of the Budget, with debt projection needed to drop to those pre pandemic to change this, although Moody’s may begin considering the removal of the negative outlook on a positive Budget, if it occurs.

“Should SA lower its projected debt trajectory to peak around the current ratio, then SA would be likely closer to seeing a positive credit rating move from one of the three key agencies, which in turn would be positive for the rand and SA’s bonds.”

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Markets and key credit rating agencies will be focusing on the debt and deficit projections and the extent of the damage inflicted by the Covid-19 pandemic on the national fiscus and, by extension, on the greater South African economy.

Analysts said it was likely that fiscal debt and deficit trajectories have improved as only a part of the expected revenue overshoot will be used for increased expenditure, given the recent political emphasis and drive towards consolidation.

However, investors and financial markets alike will largely remain cautious about the longer-term outlook, given only modest traction thus far with reforms to adequately lift trend growth.

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Momentum Investments economist Sanisha Packirisamy said she was expecting a credit-neutral Budget outcome in the near term, as the likelihood of smaller government deficit and lower government debt ratios for the current fiscal year and next should alleviate rating agency concerns.

However, she said that low trend growth, sluggish reforms and medium-term fiscal risks nevertheless painted a more bearish picture for sovereign ratings in the medium to longer term.

“Given sticky medium-term fiscal and growth risks, we believe the bias to South Africa’s sovereign rating outlook is to the downside in the medium term, despite an improved near-term outlook,” Packirisamy said.

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“An upgrade in ratings would only be likely in our view if progress on structural reform efforts boost the outlook for potential growth, allowing government to make inroads into the country’s high rates of inequality and unemployment and/or if faster fiscal consolidation and a lower debt ratio materialise in the medium term.”

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