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SA credit ratings remain firmly below investment levels

SA credit ratings remain firmly below investment levels

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South Africa’s sovereign credit ratings have remained firmly below investment levels due to the country’s low growth trend, rising debt levels and prevailing economic challenges in spite of the government’s continued efforts at fiscal consolidation.

Fitch Ratings on Friday affirmed South Africa’s credit ratings at junk status with a stable outlook, saying that the country’s low growth potential was a key credit weakness.

The ratings agency said South Africa’s long-term foreign-currency issuer default rating was constrained by high and still rising government debt, low trend growth and high inequality that will continue to complicate fiscal consolidation.

However, Fitch’s primary rating analyst Jan Friederich said the ratings were supported by a favourable debt structure with long maturities and denominated mostly in local currency as well as a credible monetary policy framework.

“The affirmation and stable outlook take into account substantial recent over-performance on fiscal revenues and the government’s strong efforts to control expenditure, which if successfully continued, could bring about debt stabilisation,” Friederich said.

“However, at this stage we assume a substantial part of recent higher revenues to be temporary and see current public sector wage negotiations pointing to increased upward pressure on spending.”

Fitch’s ratings review comes hot on the heels of S&P Global which also affirmed South Africa’s ratings below sub-investment level, albeit with a positive outlook two weeks ago.

S&P said the government’s economic and fiscal reforms could improve the country’s medium-term growth and debt trajectory, while higher-than-expected tax revenue, relative to its expectations six months ago, will help to reduce the fiscal deficit as a proportion of gross domestic product (GDP).

Meanwhile, Fitch pointed to a number of growth constraints this year, including the delay in implementing structural reforms, and worsening capacity issues to improve transport infrastructure amid rising demand for mining exports this year.

Friederich said they expected GDP growth to slow from 1.6% in 2022 to 1.1% in 2023, on the back of intensified power cuts, weakening global growth and monetary tightening, and fading support from post-pandemic re-opening, with only a mild recovery to 1.7% in 2024.

“Our forecasts assume that power shortages, which according to the South African Reserve Bank estimates held back growth this year by 1 percentage point, will not significantly improve next year and will ease only gradually in 2024,” Friederich said.

“While substantial investments in increasing generation capacity are under way, there is a risk that the power supply imbalances deteriorate further with escalating effects on growth.”

The ratings agency expects the consolidated fiscal deficit to be 5.1% of GDP in the 2023 financial year and stay close to that level in the following two years.

This compares with the government forecast that the deficit will decline to 3.9% of GDP in the 2024/25 financial year, from 4.9% in 2022/23 financial year, with the difference due to Fitch forecasting weaker government revenue and higher public sector wage spending.

It said the government’s debt stabilisation strategy relied heavily on restraining public sector payroll spending, but the ongoing public sector strike illustrated that this may prove increasingly difficult.

Fitch also expects gross loan debt to rise from 68% of GDP in this year to 75% in the 2024/25 financial year.

This compares with debt stabilising at around 71% of GDP from 2022/23 financial year in the government’s projections.

It said the transfer of one- to two-thirds of the R400 billion debt of Eskom to the government balance sheet was already incorporated in its debt forecast as stock flow adjustments.

Fitch assumed that the government will separately need to provide cash support to struggling state-owned enterprises as already provisioned for.

The ratings agency ended by saying that the factors that could, individually or collectively, lead to negative rating action/downgrade included a further significant increase in government debt/GDP, for example, due to a persistent failure to narrow the fiscal deficit and a further weakening of trend growth or a sustained shock that further undermines fiscal consolidation efforts.


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