Anaemic economic growth and sizeable contingent liabilities continue to weigh on SA’s fiscal prospects, but the government’s economic reforms should boost growth modestly from 2019, helping to contain the rise in government debt.

This was the encouraging message contained in S&P Global Ratings’ review of SA, released last week. It affirmed SA’s foreign sovereign credit rating at "BB" and didn’t change the outlook to "negative", despite the deterioration in the country’s fiscal position and growth performance.

"The stable outlook reflects our view that the SA government will pursue a range of economic, social and fiscal reforms, albeit over an extended period of time," says S&P.

The ratings agency expects these measures to boost investor confidence and support economic growth, helping to stabilise public finances over the medium term.

This is despite the "significant challenges" SA faces relating to high levels of poverty, unemployment and inequality, coupled with structural impediments and chronic skills shortages.

S&P’s view contrasts with the scepticism voiced by Fitch Ratings, which has said President Cyril Ramaphosa’s stimulus measures and other reforms are unlikely to significantly alter SA’s growth trajectory.

Fitch also follows a biannual ratings cycle and is expected to release its ratings some time soon, though it does not publish the date in advance.

Absa economist Peter Worthington expects Fitch to leave its BB+ ratings unchanged.

The stable outlook reflects our view that the SA South African government will pursue a range of economic, social, and fiscal reforms
S&P Global Ratings

"Progress in rolling back state capture should be credit positive, as should recent signs of a mild growth rebound, but the recent medium-term budget policy statement, which widened deficit targets and deferred the projected peak in public debt ratios, is likely to be viewed as credit negative," he says.

The CEO Initiative’s Jabu Mabuza says that though a significant effort is required to improve growth, S&P’s ratings action shows SA is making some progress on the reforms needed to do so.

"Though [the government’s stimulus and recovery plan] is unlikely to have a major immediate impact given the weak state of the economy, it goes some way towards rebuilding the necessary investor confidence that is crucial for achieving sustainable growth," he says.

S&P continues to hold a sanguine view of SA’s land reform process — partly because it takes comfort from the "checks and balances embedded in SA’s institutional framework, which includes a constitutionally independent judiciary".

It says: "While expropriation without compensation will force some businesses to reconsider investing in the country, we expect that the rule of law and enforcement of contracts will largely remain in place and will not significantly hamper invest-ment levels."

Given its constructive view of Ramaphosa’s reform agenda, S&P expects SA’s real GDP growth rate to pick up from 0.8% this year to 1.8% in 2019, and 2.3% in both 2020 and 2021 — slightly better than the National Treasury’s projections.

Nevertheless, S&P notes that even with this improvement, real GDP growth will remain close to zero on a per capita basis. Among the 20 major emerging markets, only Qatar, Argentina and Venezuela are likely to show slower per capita growth over the medium term.

In addition, S&P cautions that SA’s fiscal position remains weak, with sizeable fiscal deficits and contingent liabilities, and a large debt burden.

What it means

Ramaphosa’s reform efforts are likely to start paying off next year

"While we expect the government to remain committed to broad fiscal prudence, the election in 2019 makes expenditure cuts or revenue increases unlikely," it says.

However, it doesn’t rule out the possibility that improving economic growth after 2019 could lead to an upside revenue surprise.

On the other hand, it warns that it could take some time for the government to improve the financial position of state-owned enterprises (SOEs), and that there is an increased risk that they could require greater government support than provided for.

It expects general government debt to grow by an average 4.6% of GDP a year up to 2021/2022, when net debt will hit 53% of GDP. However, it estimates that when the debt of local government and SOEs is included, SA’s overall public debt is already over 70%.

S&P says it could lower the ratings on continued fiscal deterioration — due to higher expenditure pressures or structurally weaker economic performance, for example — or if external financing pressures were to rise.

It could also lower the ratings if the rule of law, property rights or the enforcement of contracts were to weaken significantly, undermining the investment and economic outlook.

Responding to the ratings, the Treasury says the government is mindful of the risks highlighted by S&P, including that subdued economic growth could lead to the ratings being lowered. It is also "fully aware that the next several months are critical", and "remains determined to achieve improved ratings in the period ahead".