Moody’s kept South Africa’s foreign and local currency ratings unchanged at Baa2, with a negative outlook in May. The outcome was in line with market expectations and shifts the risk event to November 2021, which will follow the tabling of the October 2020 MTBPS.  The analysis of the credit rating profile was mostly unchanged compared to the November 2020 rating, when another one notch downgrade, with a negative outlook in the sub-investment grade bucket, was announced.

Very little has changed from the November 2020 downgrade: 

Macro-economic forecast: The forecast period was extended to 2022. The fiscal position was revised lower for 2020 and 2021 owing to a better outcome for tax revenue receipts in 2020 and the carry over base effect for 2021. The budget deficit projection for 2021 was lowered from 11.8% to 10.0% with 2022 forecast at 8.3% of GDP. The general government debt level, which includes Eskom’s contingently liabilities of ~5%, was lowered in 2021 from 93.3% of GDP to 90.9%. Moody’s does not expect a stabilisation in the debt-to-GDP ratio and expects a renewed acceleration in 2022 to 94.9%. The key drivers remain lacklustre GDP growth, which is expected to fade to 1.2% in 2022 after a strong 4.5% rebound in 2022. The SARB’s growth forecast expects a smaller rebound of 3.8% in 2021 and somewhat faster growth of 2.4% in 2022. Fiscal space remains limited with a bigger share of revenue allocated to debt servicing costs (18.3% (from 21.4%) in 2021 and 19.0% in 2022).

The same key issues are keeping the rating outlook negative: The include risks to (1) the debt-to-GDP trajectory, (2) an already weak growth trend, and (3) additional financial assistance to SOEs with reference to the outstanding issue of dealing with Eskom’s debt, and (4) higher interest rates (with funding costs already exceeding nominal GDP which renders it difficult to stabilise the rising interest rate bill bar from containing current spending).

Implementing National Treasury’s base case scenario required to a stable outlook: The factors that could lead to a stable outlook or even an upgrade in our view is aligned with National Treasury’s base case presented in the February 2021 Budget Review, which factors in a wage freeze. According to National Treasury’s estimates, a CPI-linked increase could raise public compensation by an additional R113bn and CPI + 1% by R132.7bn (or 2.2% of GDP over the MTEF period. The current status of the wage negotiations that were deadlocked at the end of April, is that mediators will report back to the bargaining council this coming weekend on a new wage offer from the government. 

Next rating announcements

S&Ps ratings review on 21 May (after hours)

Next Moody’s and S&P rating reviews: 19 November