Critical but stable? What Fitch’s latest rating means for you

Global rating agency Fitch recently affirmed a BB rating on South Africa’s foreign and local currency debt, signifying a ‘stable’ outlook. But why is that important to the average South African?

“South Africa needs a massive investment drive to lift the economic growth trajectory and policy continuity to break economic inertia,” said Jee-A van der Linde, senior economist at Oxford University.

He said the country’s economic issues are structural, worsened by a lack of investment and poor maintenance of critical infrastructure.

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So, what is Fitch rating?

Fitch rating is a credit rating assigned by the global agency based on an in-depth analysis of relevant information such as management forecasts and risk reports – to make findings on the entity’s relative vulnerability to default or loss.

Why is this important? Based on the credit rating, investors can make informed decisions on whether to invest – in this case, in South Africa.

So, a poor credit rating means less chances of investment and lower economic growth.

Why should I care?

Economist Dawie Roodt told The Citizen ratings are important, and “everyone is affected” – including ordinary South Africans.

“A bad rating means an increase in interest rates, higher taxes and possible inflation,” he said.

In short, it could lead to your money going less further and you paying more for neccesities, such as food and housing.

Government, as the largest role player in the economy, relies on these ratings to attract “buyers.”

Roodt says a poor rating results in a diminished desire for investors to buy government debt.

As result, government turns to local buyers to fund the debt – “because the money must come from somewhere,” Roodt says.

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But, why the rating?

Fitch says the country’s credit rating is affected by low real GDP, which is hampered by a number of factors.

• Power shortages
• High inequality
• High government debt-to-GDP ratio
• Low fiscal consolidation

According to Van der Linde, Fitch expects the consolidated budget deficit to widen to 4.5% of GDP next year.

He said the rating agency doesn’t foresee the possibility of economic growth in 2023, predicting sluggish economic growth of just over 1% within the next couple of years.

Like a satisfactory report card

Economic expert Prof. Bonke Dumisa told The Citizen the rating was like a “satisfactory” school report card. He said there’s plenty of room for improvement and solving the country’s energy crisis should be prioritised.

Dumisa said demand for electricity has increased exponentially since 1994, but supply remains the same – so the breakdown has been long coming.

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He notes recent events like truck torching and leadership uncertainties as contributing factors to the country’s BB rating.

When it comes to unemployment, Dumisa says economic growth is a collective effort, and “everyone” has a role to play.

“Government’s role is to create a conducive environment for businesses to thrive”, says Dumisa, further reiterating the critical need for measure to address the country’s energy crisis.

National Treasury said in a statement government is “implementing measures to reduce load-shedding in the short-term and transform the sector through market reforms to achieve long-term energy security.”