SA must prepare for economic calamity, as S&P downgrades rating outlook

South Africa faces an economic mess as S&P Global Ratings downgraded the country’s rating outlook from positive to stable to reflect that the country’s reforms to improve governance at state-owned enterprises and tackle worsening infrastructure constraints are simply too slow.

In addition, the economic growth outlook deteriorated significantly in recent months due to the electricity crisis and logistical bottlenecks, while liabilities from SOEs pose an increased risk to the fiscus and to South Africa’s debt position, says economic research group, Oxford Economics Africa.

The group lists more intense power outages, a disappointing 2023 Budget, an underwhelming Cabinet reshuffle, the country’s recent greylisting and the latest economic contraction as reasons for the downgrade.

“Although the country’s credit rating remains unchanged at BB-, the latest ratings action and the weakened domestic growth outlook means a credit rating downgrade is now more likely.”

This downgrade comes after the shock contraction in gross domestic product (GDP) for the fourth quarter of 2022 announced yesterday, which takes the economy back to pre-pandemic levels, while conditions have worsened with the country already averaging stage 4 load shedding since the start of 2023.

“While the South African government has made a fuss about its power sector reform, recently appointing a dedicated electricity minister to jolt the economy back to life, manufacturers have been hard hit by the unrelenting electricity shortfall.”

ALSO READ: Thank you load shedding! Manufacturing in SA down sharply

Eskom must change and improve

The group said if Eskom does not adapt its business model, improve efficiencies and receive the governmental support it needs, a debt reduction on its own will not be enough to remedy South Africa’s electricity crisis.

S&P forecasts government debt to increase to 78.7% of GDP in 2026 from 71.5% of GDP in 2022, but Oxford Economics Africa says it continues to believe that government debt will stabilise at higher levels of around 80% of GDP.

The ratings agency also revised its 2023 real GDP growth forecast down to 1.0% from 1.5% and Oxford Economics Africa points out that more than half of South Africa’s economic industries are still performing below pre-pandemic levels, with most of them part of the labour-intensive sectors.

“Structurally high income inequality and extreme unemployment cannot be remedied under the current weak economic trajectory. With commodity price tailwinds fading and exporters struggling to get their goods to and through domestic ports, South Africa’s external position will deteriorate this year. S&P expects the current account deficit will average 1.6% of GDP over the medium term and widen to 1.9% of GDP by 2026,” S&P said.

ALSO READ: Recession at the door, as South Africa’s fourth quarter GDP worse than expected

Greylisting could lead to further rating downgrade

However, S&P added that it believes that the Financial Action Task Force’s decision to include South Africa on its greylist is unlikely to affect the country’s creditworthiness, but it “could weigh on government borrowing costs and raise financial transaction and compliance costs for the economy and trade flows”.

S&P places South Africa’s sovereign credit rating three notches below investment grade, in line with that of Fitch, but weaker than Moody’s credit rating which is one grade higher.

Oxford Economics Africa says that domestic infrastructure failures are undermining growth and external conditions are less favourable than they were before, which means the country can no longer rely on another global upswing in commodity prices.

“Only government can provide the guidance and reform needed to turn things around. Although real GDP increased by 2.0% in 2022, StatsSA data shows that the economy has grown by only 0.3% from 2019’s pre-pandemic levels, which means the economy is stagnant.”

In addition, the latest rating actions imply the economy is regressing and the government is consistently missing the mark with infrastructure failings across the board. The group says S&P’s revision of the country’s credit rating outlook implies that a future credit rating downgrade is now considered more probable.

ALSO READ: S&P maintains SA’s positive credit rating

Government response to rating outlook downgrade

National Treasury said in a statement that government notes S&P’s decision to revise South Africa’s credit rating outlook to stable from positive, while affirming the long-term foreign  currency debt ratings at ‘BB-‘ and local currency at ‘BB’. 

“Government acknowledges that higher economic growth and a durable recovery in economic activity require a stable macroeconomic framework, complemented by rapid implementation of economic reforms and improved state capability.”

Government is taking urgent measures to reduce load shedding in the short term and transform the sector through market reforms to achieve long-term energy security, Treasury says and adds that other reforms are under way to improve performance in the transport sector, in particular freight rail.

“In addition, fiscal consolidation measures have positioned the public finances to absorb a portion of Eskom debt, maintain support for the economy and the most vulnerable and make budget additions to fight crime and corruption.”