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Moody’s changes SA’s credit rating to stable, affirming government’s structural reform programme

Key driver is improved fiscal outlook, stabilising debt burden, and scrutiny on spending. Picture: Brendan McDermid, Reuters.

Key driver is improved fiscal outlook, stabilising debt burden, and scrutiny on spending. Picture: Brendan McDermid, Reuters.

Published Apr 4, 2022

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Key driver is improved fiscal outlook, stabilising debt burden, and scrutiny on spending.

Moody’s Investors Service has changed SA’s credit ratings outlook to stable from negative, which has been welcomed by the government as affirmation of its structural reforms programme.

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Moody’s on Friday affirmed South Africa’s Ba2 long-term local and foreign currency issuer, and senior unsecured-debt ratings.

SA’s ratings status was downgraded to Ba2 with a negative outlook by Moody’s in November, 2020 after the economy entered a deep recession as a result of the Covid-19 pandemic, and lockdown restrictions.

Moody’s lead analyst for South Africa, Lucie Villa, said the government had shown it was able to re-prioritise its spending over the past two fiscal years while staying committed to fiscal consolidation.

Villa said the decision to affirm South Africa’s ratings at Ba2 reflected the country’s long-standing credit strengths, including a sound financial sector and external position, combined with persistent weaknesses primarily stemming from deep structural constraints on economic growth.

“South Africa’s fiscal position has markedly recovered from the pandemic thanks to the government’s fiscal consolidation measures, and positive external developments,” Villa said.

“As a result, it now looks likely that the government’s debt-to-GDP ratio should stabilise at around 80 percent, including guarantees to SOEs, over the medium term.

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“This marks an improvement compared to Moody’s previous projections of a long period of ever-rising debt-to-GDP.”

In February, Finance Minister Enoch Godongwana said the consolidated Budget deficit was projected to narrow from 5.7 percent of GDP in 2021/22 to 4.2 percent of GDP by 2024/25.

Godongwana said the government now expected to realise a primary fiscal surplus – where revenue exceeds non-interest expenditure – by 2023/24.

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South Africa’s debt ratio is expected to stabilise at 75.1 percent of GDP by 2024/25 – 3 percentage points lower than previously projected, and the first time since 2015 that the country reduces its borrowing requirement.

Villa said Moody’s expected that the government would continue to pursue its fiscal consolidation strategy.

She said tax compliance was likely to improve gradually as the South African Revenue agency (Sars) rebuilt some of its institutional capacity after a period of deterioration in terms of human capital, and public standing.

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“This would provide a degree of fiscal flexibility to manage risks associated with rising social demands amid inflationary pressures, and a very high and rising unemployment rate – 35 percent as of the third quarter of 2021,” Villa said.

On Friday, Sars announced a tax revenue of R1.563 trillion for the year ending March 31, 2022 representing a 25 percent increase or R314bn compared to the prior year.

The National Treasury on Friday said the government’s commitment to restoring sustainability to public finances was supported by better-than-expected revenue collection.

“As stated in the 2021 MTBPS and 2022 Budget, the government is using a portion of the additional revenue to accelerate debt stabilisation, with the majority targeted to address urgent social needs, promote job creation through the Presidential Employment Initiative, and support the public health sector,” it said.

“Faster implementation of economic and other reforms, accompanied by fiscal consolidation to provide a stable foundation for growth would ease investor concerns, and support a faster recovery and higher levels of economic growth.”

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