S&P affirms stable outlook for SA’s currency debt ratings

S&P on Friday decided to affirm South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively, and maintained the stable outlook.

S&P on Friday decided to affirm South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively, and maintained the stable outlook.

Published Nov 20, 2023


S&P Global ratings agency has flagged ongoing logistics bottlenecks as the biggest risk that could continue to constrain medium-term growth prospects in South Africa, in contrast to a forecast of easing load shedding during the same period.

This comes as Transnet Port Terminals (TPT) has warned that it may suspend the processing of trucks bringing cargo into the Port of Richards Bay terminals via road as trucks have clogged up the system on the back of railway inefficiencies.

TPT has also said it would take several weeks to clear the backlog of vessels at the Port of Durban’s container terminals due to operational inefficiencies and waste in the system.

These ports are critical to South Africa’s economic output and tax revenue as they export millions of tons in varied commodities consisting mainly of ores and mineral cargo such as magnetite to ferrochrome, woodchips to aluminium and steel while also importing commodities including sulphur, coking coal and alumina.

S&P on Friday forecast that South Africa’s real gross domestic product (GDP) growth would slow to 0.8% this year followed by a pick-up to 1.6% on average over 2024-26 as more electricity supply comes on stream.

S&P primary credit analyst Zahabia Saleem Gupta cited a study by a local boutique consultancy, GAIN group, which calculated the economic cost of rail inefficiencies at 5% of GDP in 2023.

Gupta said the logistics bottlenecks have had a devastating impact on the country’s export industries capacity, rising the cost of doing business and affecting the government tax revenues.

“Bottlenecks at ports and problems with railways hinder South Africa’s ability to get key exports to global markets, despite high prices over the past two years,” Gupta said.

“Wholly government-owned Transnet remains the sole provider of rail transport for coal and other mining commodities to ports.

“The lack of capacity has seen rail transportation volumes drop by over 30% since 2018. Mining firms have resorted to transporting export commodities via road at higher costs or stockpiling excess production.”

Nonetheless, Gupta said S&P was forecasting that the rising private sector electricity generation would likely ease South Africa's energy shortages from 2025.

She said private-sector investment in power generation and renewables was picking up and would support the strengthening of real gross domestic product growth to average 1.6% over 2024-26.

However, Gupta said although policy and reforms to address infrastructure deficits were ongoing, execution remained slow.

“The removal of limits on private-sector power generation and tax rebates of 125% on renewables have incentivised higher private investment,” she said.

“With additional energy capacity from renewables projected at 11 000 megawatts over the next three years, we expect power outages to ease from 2025.

“However, delayed investments and funding shortages at utility Eskom, as well as issues around transmission and distribution, could risk the overall sector recovery.”

S&P on Friday decided to affirm South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and ‘BB’, respectively, and maintained the stable outlook.

This comes as the ratings agency unexpectedly downgraded South Africa’s credit rating outlook to stable from positive in March in an unscheduled announcement, citing increasing pressure from severe electricity shortages.

According to S&P, the stable outlook balances South Africa's credit strengths – particularly a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets – against infrastructure-related pressures on growth, and downside risks to the fiscal and debt position.

However, the ratings agency said fiscal risks had risen again as the effects of higher commodity prices on government revenue waned.

Given revenue under-performance and higher spending, S&P forecast that South Africa's consolidated fiscal deficit would rise to nearly 5% of GDP in fiscal 2023 (ending March 31, 2024).

It said that lower corporate income taxes, primarily due to a fall in mining revenue, and higher value-added tax refunds would lead to an estimated revenue shortfall of 0.8% of GDP for the current fiscal year.

As a result, S&P said higher-than-expected fiscal deficits, along with a debt relief package for Eskom, would lead to gross general government debt rising to 83% of GDP by fiscal 2026, from 72% in fiscal 2022.

S&P’s debt forecasts are higher than the government’s, which stabilise at 77% of GDP in fiscal 2025.

In response, the government has committed to implementing reforms in the economic recovery plan in addition to fiscal consolidation by the National Treasury.

“Over the next three years, the government will focus on raising GDP growth by improving the provision of electricity and logistics, enhancing the delivery of infrastructure and restructuring the state to be efficient and fit-for-purpose,” it said.

“Fiscal policy continues to support this approach by stabilising debt and debt-service costs. Additionally, fiscal consolidation will be implemented through spending reductions, efficiency measures across government and moderate tax revenue measures.”