Moody’s keeps SA sovereign credit rating unchanged

Moody’s Ratings has affirmed South Africa’s sovereign credit rating at Ba2 and maintained a stable outlook thanks to the country’s credit strengths from effective, core institutions, such as the judiciary and the central bank, a robust, deep financial sector and a solid external position.

However, in a statement, Moody’s says it also acknowledges chronic challenges posed by the country’s extensive inequalities which hamper reform progress and fuel social risk, as well as persistent structural constraints on economic growth and a relatively high and costly debt.

“The recently formed government of national unity (GNU) has committed to continue the reform momentum of the previous administration, which began to show progress in the energy sector. However, we anticipate only a modest acceleration in economic growth.

“In turn, subdued growth complicates the challenge of preserving debt sustainability while meeting social demands and stimulating investments in critical network infrastructure, particularly in the energy and logistics sectors.”

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Moody’s stable outlook reflects these expectations

According to Moody’s, the stable outlook reflects its expectations of low economic growth, a stable government debt burden at around 80% of gross domestic product (GDP) and balanced risks. “We anticipate the GNU will pursue structural reforms, easing growth bottlenecks and supporting a very gradual uptick in growth to close to 2%.

“The government’s fiscal consolidation efforts to mitigate spending pressures from social demands, interest payments and state-owned enterprises will help stabilize the debt burden. Economic and fiscal reforms could yield more significant and immediate impacts than we currently expect.”

Conversely, Moody’s says, they could fall short in efficiency or be reversed. “In addition, government revenues remain vulnerable to a fall in global demand, potentially arising from reduced trade between its two main partners, China and the US.

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This is when Moody’s would consider downgrading SA

Moody’s also warns that it could consider downgrading South Africa’s ratings if the country’s economic growth prospects further deteriorate from current subdued levels, coupled with a persistent decline in its fiscal strength.

“This could occur due to setbacks in implementing structural reforms, particularly those aimed at improving the energy and logistics sectors. Such setbacks might result from political divisions and/or instability within the governing coalition, leading to considerable policy uncertainty and impeding the advancement of crucial structural reforms.

“Signs that the state-owned enterprises sector requires financial assistance far exceeding our current expectations, thereby hindering the government’s fiscal consolidation efforts, would also place pressure on the rating.”

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This is when Moody’s will consider an upgrade

However, Moody’s also says it will consider upgrading the ratings if South Africa significantly alleviates the structural constraints on economic activity, strengthening the prospects of robust growth and eventual reduction in government debt.

“Clear indicators of sustainable improvement in the energy and logistics sectors would also be important markers, indicating higher growth potential and reduced contingent liability risks from the state-owned enterprise sector.

“Similarly, a significant and sustained increase in the levels of investment in the economy would indicate that the government’s strategy to encourage the private sector is proving effective.”

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Moody’s decision consistent with general expectations

Jee-A van der Linde, senior economist at Oxford Economics Africa, says Moody’s decision to affirm South Africa’s sovereign credit rating with a stable outlook is consistent with general expectations. “Overall, the rating agency’s narrative remains the same: Moody’s anticipates moderate economic growth and high but stable government debt, with balanced risks to the outlook.”

He points out that like the other main rating agencies, Moody’s envisions ongoing reform momentum under the GNU and expects only a modest acceleration in economic growth.

“The contraction in real GDP in the third quarter implies Moody’s 1.1% economic growth forecast for 2024 is probably too high, while the agency’s real GDP growth forecast of 1.7% per year for 2025-2026 aligns with our projections.

“Moody’s noted that South Africa’s subdued growth outlook complicates the challenge of preserving debt sustainability, considering elevated social financial needs and critical infrastructure inadequacy. The rating agency expects gross government debt to stabilise at around 80% of GDP over the medium term.”

Moody’s places South Africa’s sovereign credit rating two notches below investment grade, while Fitch’s and S&P’s credit ratings are another notch lower, as illustrated in this graph:

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Consistent message from ratings agencies

Van der Linde says the message from the main rating agencies has been fairly consistent: generally, they expect a moderate pickup in economic growth and more policy predictability under the GNU.

“While all the agencies welcome government’s commitment to fiscal consolidation, they all note that spending pressures relating to state-owned enterprises, public sector wages and social support programmes remain high, while uncertainty around national healthcare reform is considered a latent risk to the fiscus.

“Moreover, South Africa’s subdued economic growth outlook means the government debt burden will continue to increase, with gross government debt expected to reach 80% of GDP over the medium term. We maintain our view that it is still too early for credit rating upgrades.”