S&P affirms rating on SA despite growth and fiscal challenges

Ratings agency S&P Global has given SA its sign of approval even before this week’s budget, affirming SA’s credit rating and keeping it on positive outlook — but warning that it could still downgrade its rating if there was no progress on economic and governance reforms. 

In a scheduled update on Friday evening, S&P said that, despite disagreements with coalition partners over the budget, the government had managed to remain intact, which bodes well for broad policy continuity and reform momentum.

“Despite the retabling of the budget and the likely removal of VAT, the government plans to continue with fiscal consolidation and fiscal financing benefits from access to deep domestic markets and enhanced reform momentum,” the agency said.

The update allayed concerns in the market that it could look to remove the “positive” tag on SA’s outlook due to slower economic growth and the debacle regarding the budget.

S&P, traditionally the most pessimistic of the “big three” on SA, surprised the market in November when it upgraded the outlook on the rating from stable to positive, citing increased political stability and greater impetus for reform after the formation of the government of national unity. A positive outlook suggests the agency could look to upgrade the rating itself in the next year if economic growth or the public finances improve faster than expected.

S&P’s rating on SA, at double B minus (BB-) is three notches into subinvestment grade (junk) territory, in line with rival Fitch but one notch below Moody’s. A ratings upgrade would turn the cycle after years of downgrades, which began in 2012 and culminated on the eve of the Covid-19 lockdown in 2020, when Moody’s became the last of the big three ratings agencies to junk SA’s rating. 

S&P now expects GDP growth of 1.3% this year — down from its 1.6% forecast in November. But it sees this rising to an average 1.5% over the next three years, with reform momentum continuing and Operation Vulindlela launching its second phase. It warned, however, that “growth will be limited by potential US tariffs and global tariff-related risks”. It warned too that geopolitical strains might lead to weaker US investment in SA, with SA’s diplomatic relations with the US having become “more complicated”.

The agency said on Friday the government would face a tough battle to revive growth and maintain fiscal discipline, while navigating coalition politics. If the coalition collapsed and “left of centre” opposition parties MK and the EFF joined the coalition with the ANC it would detrimentally affect growth and fiscal consolidation. 

Like the IMF, S&P is more pessimistic than the Treasury on SA’s public debt trajectory, predicting gross government debt will remain high, averaging 80% of GDP in fiscal 2025-28. “We forecast larger deficits than the government, largely because of potentially higher wages and likely higher transfers to several state-owned enterprises that have ongoing liquidity strains, including Transnet,” S&P said.

Economists expect Wednesday’s budget to show a deficit similar to those in Godongwana’s March 12 budget, with this year’s spending cut by about R12bn to offset the revenue lost due to the removal of the VAT increase he had proposed, and a possible fuel tax increase. However the debt trajectory may worsen somewhat given a worse economic growth outlook.

SA’s mildly positive ratings update from S&P came as a stark contrast to that of the US, which Moody’s on Friday toppled off the top of the investment grade ratings scale, stripping the US of its triple A credit rating as it cited rising levels of government debt and a widening budget deficit. 

The Treasury on Friday night noted the rating and said: “The government’s growth strategy will continue to focus on maintaining macroeconomic stability to reduce living costs and grow investment, executing reforms to promote a more dynamic economy, building state capacity in core functions and supporting growth-enhancing public infrastructure investment”.

Sovereign credit ratings influence the cost at which governments borrow on the market, which in turn tends to shape borrowing costs across the whole economy.

S&P is the only one of the three big credit ratings agencies to have a split rating on SA. While its foreign currency rating is at double B minus (BB-), which is three notches into junk (subinvestment grade) territory, its local currency rating is one notch higher at double B (BB). This is essentially because the government’s ability to repay its rand denominated local currency debt is higher than its external foreign currency debt thanks to SA’s strong and deep domestic financial markets, where the government does most of its borrowing.

joffeh@businesslive.co.za