December 2, 2022

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Fiscal, political risks to keep SA’s junk credit ratings unchanged

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Major credit-ratings companies will probably only consider taking decisive action on South Africa’s junk assessment after the governing party elects a new leader and more detailed plans to tackle the state-owned power utility’s unsustainable debt burden are announced.

South Africa’s credit ratings are at their lowest levels since they were first assigned almost three decades ago. Moody’s Investors Service and S&P Global Ratings are both due to publish reviews Friday, with Fitch Ratings expected to follow soon after.

While last month’s budget update showed an improvement in the trajectory of government debt and fiscal deficit metrics, and recently announced energy sector reforms are expected to eventually revive economic growth, the outlook for public finances remains clouded.

Ratings spiral, foreign currency, debt, S&P Global ratings, Fitch Ratings, Moody's Investors Services

Questions about pending debt relief for power company Eskom will only be answered in February. There’s also uncertainty over how the government will respond to pleas for increased support from other state companies, higher-than-budgeted pay demands by civil servants, calls to expand the social welfare net, and a potential deterioration in South Africa’s terms of trade and global economic prospects.

Read: Moody’s lifts Eskom outlook to positive for 1st time in 15 years

“Better fiscal numbers are offset by global and local risks as well as slow progress on energy and transport reforms,” said Sanisha Packirisamy, an economist at Momentum Investments. “As such, we expect no change from the rating agencies at the upcoming reviews.”

Ratings companies are also expected to adopt a wait-and-see approach ahead of the governing African National Congress’s elective conference next month. President Cyril Ramaphosa, who is considered business- and market-friendly, is widely expected to seek — and win — a second term as party leader, although his party has yet to announce the candidates who’ve met the nominations thresholds to contest top posts.

If “politics and policy keep on improving” the three companies may all upgrade their outlooks to positive around March, Johann Els, chief economist at Old Mutual Investment Group, said in an interview.

Still, the government has a long way to go to return debt — now seen peaking at 71.4% of gross domestic product in the current fiscal year — to levels of about 30% that were last seen before the global financial crisis, and to stabilise the budget shortfall at about 3% of GDP, according to Els.

“It’s going to be a while still before we get an actual upgrade in the rating and longer still before we get to investment grade,” he said.

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