CLAIRE BISSEKER: SA dodges another bullet — for now
Just because country’s credit rating wasn’t downgraded this time doesn’t mean we can brush off warnings
With SA’s credit ratings mired two to three notches deep into junk territory, and so much bad news already priced in, sovereign credit rating reviews seem to have lost some of their signalling power.
That S&P Global Ratings affirmed SA’s BB- foreign currency rating and left the outlook as “stable” at the end of last week could easily be dismissed as a non-event. But just because the outlook wasn’t downgraded to “negative” doesn’t mean we should brush off the warnings from S&P, Fitch Ratings and Moody’s in response to the recent medium-term budget policy statement (MTBPS), which showed a sharp deterioration in the country’s debt outlook.
Of the three, Fitch (which affirmed SA’s BB minus rating with a stable outlook in July) sounds the most sceptical, warning in a post-MTBPS statement that there is “significant risk” that the government will miss its new target for the debt ratio to peak at 77.7% of GDP in 2026 (previously 73.6%). All three ratings agencies expect SA to have serious trouble reining in spending, given pressure from the wage bill, weak state-owned enterprises and social relief grants.
S&P is particularly bearish on debt, forecasting that the debt ratio will hit 83% by 2026 — about five percentage points worse than the Treasury’s estimate. And yet S&P remains fairly sanguine overall. It has maintained our “stable” outlook because the country’s credit weaknesses (infrastructure-related pressures on growth, and downside risks to the debt position) are roughly offset by its strengths (a credible central bank, flexible exchange rate, actively traded currency and deep domestic capital markets).
Though S&P considers SA’s public finances to be “strained”, and notes that local banks’ exposure to the government has risen steeply, it thinks there is still room for them to keep absorbing additional government debt. There is also plenty of scope for us to increase concessional financing from multilateral institutions, it notes. So, in S&P’s view the risk of an imminent funding crisis would appear limited.
However, Fitch notes that a durable resolution to SA’s fiscal challenges will require a substantial acceleration of growth. And here’s the rub. Fitch projects only a minor strengthening in real GDP growth to 0.9% in 2024 and 1.3% in 2025, while the National Treasury sees growth averaging just 1.4% over the medium term and still failing to pierce 2% by 2026. In a punishing environment of high interest rates, this makes it unlikely that the country’s fiscal position will stabilise without politically implausible spending cuts.
SA’s problem, apart from spending too much, is that the growth it needs must be sufficient to support fiscal consolidation and address challenges linked to high inequality and unemployment. However, SA hasn’t enjoyed growth like that for years.
The Reserve Bank estimates that our growth rate could be above 3% if we ended load-shedding, fixed the logistics system and removed other constraints to growth. But for rapid growth to be sustainable such fixes would need to be complemented with a clear growth strategy that ramps up investment in economic infrastructure, among a host of other things.
Instead, SA continues to bumble along, with reforms and concessions being slowly wrung out of the main culprits, Eskom and Transnet, even as other parts of the government and public infrastructure continue to decay. We can all see the steady erosion of the state and the country’s growth potential. The fact that S&P has affirmed our ratings this time doesn’t mean it can’t see it too.
Reading between the lines, none of the agencies has much confidence that we will get our act together. We may have dodged a bullet today, but unless there is a sea-change in our growth and governance prospects debt will soon pierce 80% and then, with our fiscal credibility in shreds, the bond market (and the credit ratings agencies) may not be so accommodating.
On current policies, it’s just a matter of time before SA suffers another full-notch downgrade.
• Bisseker is a Financial Mail assistant editor.
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