S&P gives SA’s stable BB- credit rating but reforms need urgency

S&P Global Ratings affirmed South Africa’s credit rating stable at BB-, giving the country more time to show that its restructuring efforts to boost economic growth and turn around beleaguered parastatals are yielding results.

If government can do this, rating agencies might see it as a positive development, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

“The economy’s lacklustre growth outlook, the weak fiscal balance and high public debt pose significant downside risks and raise the odds of unfavourable credit rating actions.”

However, he warns, reforms are happening too slowly and time is not on government’s side.

The rating agency said it expects South Africa’s consolidated fiscal deficit to widen to nearly 5% of gross domestic product (GDP) in 2023/2024 due to revenue underperformance and higher spending. S&P forecasts gross government debt will increase to 83% of GDP by the first quarter of 2027, while interest costs are set to rise to 20% of government revenue on average, higher than its previous estimates of 79% and 19%, respectively.

“Although public finances are strained, deep domestic capital markets and increasing concessional financing from multilateral institutions should provide adequate funding sources for government,” S&P said.

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

Weak growth, electricity shortfalls and logistic bottlenecks

S&P noted that South Africa’s weak growth outlook will put pressure on the country’s generally sound and well-capitalised banking system in the near term, while electricity production shortfalls and logistic bottlenecks were flagged as key impediments to economic growth.

Although policy and reforms to address infrastructure deficits are ongoing, execution remains sluggish and S&P believes that the ANC could lose its parliamentary majority in the 2024 general elections.

Strikes and protests are flaring up due to deteriorating economic conditions and poor service delivery, which could translate into weaker support for the ANC at the polls, the rating agency said.

Van der Linde says S&P Global’s latest rating affirmation of South Africa’s creditworthiness comes with more downside risks than positives.

“The sustained increase in South Africa’s gross government debt, together with the tight financial conditions, mean that financing risks have increased.

“In addition, fading commodity price tailwinds amid numerous impediments to economic growth increases the likelihood of further fiscal slippage in the build-up to next year’s budget,” Van der Linde warns.