Junk rating stable in SA – for now

S &P Global and Fitch Ratings affirmed South Africa’s long-term sovereign credit rating on Friday at BB-, which is three notches below investment grade.

While expected, the confirmation will come as a relief for National Treasury, which is trying to make headway in getting the country out of “junk” status.

This, however, is expected to take years.

In terms of outlook, S&P has maintained a “stable” view, while Fitch maintained its outlook as “negative”.

S&P had a slightly more optimistic tone, highlighting the country’s better current economic performance.

However, it warned about the slow pace of Covid-19 vaccinations as a new medium-term constraint to growth.

The ratings agency reiterated its concerns around SA’s structural constraints and the need for reforms.

On the local currency ratings front, S&P affirmed its “BB” assessment.

“South Africa’s near-term economic performance and current account are experiencing a cyclical uplift … following a large economic contraction in 2020, and improving terms of trade from higher commodity prices,” S&P notes.

“Nevertheless, structural constraints, a weak pace of economic reforms, and low vaccination rates will continue to constrain medium-term economic growth, and limit the government’s ability to contain the debt-to-GDP [gross domestic product] ratio,” it adds.

Fitch, which also affirmed its local currency debt rating at “BB-”, says in its report the country’s rating is constrained by high and rising government debt, low trend growth and exceptionally high inequality that will complicate consolidation efforts.

“The rating is supported by a favourable debt structure with long maturities and mostly denominated in local currency. The negative outlook reflects continued substantial risks to debt stabilisation despite the better-than-expected fiscal out turns in the fiscal year ending March 2021,” it adds.

While it also recognised SA’s current economic upswing, it is more cautious about medium to long-term growth, citing lingering concerns around public finances and electricity shortages.

“SA’s economy is in the process of recovering from the sharp contraction of 7% last year and we expect growth of 4.3% in 2021 and 2.5% in 2022,” Fitch says.

“Growth will be supported by the base effect and the rise in commodity prices. However, tight public finances, and in the near term, electricity shortages will hold back growth,” it adds.

Fitch’s 2021 growth forecast is slightly higher than the latest forecast by the SA Reserve Bank (Sarb) last Thursday.

In announcing the Sarb’s Monetary Policy Committee (MPC) repo rate decision, central bank governor Lesetja Kganyago noted the economy is expected to grow by 4.2% in 2021, up from the 3.8% growth forecast at its March MPC meeting.

“We expect medium-term growth to remain low at less than 2%, a key rating constraint, complicating fiscal consolidation. We are not factoring in a large impact from the government’s reforms, which seem limited in scale and slow in implementation,” says Fitch.

National Treasury said in a statement government acknowledges the pressures the country’s credit ratings face.

It “remains committed to addressing” the issue.

“Operation Vulindlela is a key initiative in this regard and demonstrates government’s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability,” it said.