South Africa remains a long way away from restoring its sovereign credit ratings status back to investment grade, despite making serious progress in its fiscal discipline and debt metrics.
On Friday, S&P Global Ratings agency maintained South Africa’s government bonds below investment grade, but acknowledged the improvement in the fiscus.
South Africa’s sovereign credit ratings status – as set by major ratings agencies Moody’s Investor Services, Fitch Ratings and S&P Global – is deep in junk territory.
Only the newly-established Sovereign Africa Ratings (SAR) pegged the country’s sovereign bonds at investment grade with a medium risk of a default in September.
S&P Global affirmed South Africa’s currency debt ratings at ‘BB-’ and ‘BB’, respectively, and retained a positive outlook.
On Friday night, S&P said the government’s economic and fiscal reforms could improve the country’s medium-term growth and debt trajectory.
S&P cited the country’s strong financial markets and an improved fiscal and debt position as reasons for maintaining its outlook.
It said that higher-than-expected tax revenue, relative to its expectations six months ago, would help to reduce the fiscal deficit as a proportion of gross domestic product (GDP).
“Higher-than-expected government revenue has supported the fiscal position this year, but fiscal pressures remain,” the ratings agency said.
However, it warned there were a number of threats to government finances, including a slowing global economy, the public sector wage bill and Eskom’s load shedding.
Eskom has intensified its rotational power cuts to Stage 4 indefinitely, due to continuing unplanned breakdowns in its coal fleet and the depletion of its R11 billion budget for diesel at its open-cycle gas turbines.
Public sector workers unions have threatened a one-day strike on Tuesday after they rejected government’s wage offer of 3% pensionable and 4.5% non-pensionable wage increases, which will come at a cost of R34bn to the fiscus.
S&P also said it sees the low external debt position, flexible currency and deep domestic capital markets as fundamental credit strengths that should cushion against external rising financing risks.
In his mid-term budget statement, delivered last month, Finance Minister Enoch Godongwana said revenue collection had exceeded projections and that the budget deficit would shrink faster than before, with debt stabilising at a lower level.
South Africa’s gross tax revenue estimate for 2022/23 was revised up by R83.5bn to R1.68 trillion, largely due to improvements in corporate income tax collections.
In response to S&P’s decision, the National Treasury on Saturday said it had to balance all priority needs in its medium-term fiscal strategy.
“Government's medium-term fiscal strategy prioritises achieving fiscal sustainability by narrowing the budget deficit and stabilising 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,” it said.
Head of investments at 10X, Chris Eddy, said sovereign rating decisions matter because they affect government debt costs, and therefore government spending.
Eddy said that in the South African context, all debt, whether it be corporate or even individual debt, was ultimately benchmarked against the government cost of debt.
“If you have a higher cost of debt there is a negative feedback loop in terms of how much government spending goes on repaying that debt versus how much can be spent on service delivery, or infrastructure spending to stimulate growth.
“So, if the cost of SA government debt is lowered, you have this potential of the cost of debt for corporates and individuals being lowered, which can cause a ‘crowding in’ of investments to further add to that virtuous cycle,” Eddy said.
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