S&P changed South Africa’s sovereign rating outlook from positive to stable last night (BB-, stable). This is a surprise as the following rating review is scheduled on 19 May. In May 2022, the outlook was adjusted from neutral to positive but in November 2022, the outlook was left unchanged. It was anticipated that S&P could raise the rating by one notch in its November review. But the intensification of load shedding and deterioration in logistics rendered a more cautious response from S&P.

The issues flagged by S&P are (1) the increasing pressure from infrastructure constraints, specifically the severe electricity shortages; (2) slow progress to address the infrastructural shortfall and improve governance and performance at SOEs weigh on growth, and (3) SOE’s continues to pose a risk to the fiscal and debt position (if the government has to make good on contingent liabilities).  

Rationale

Growth outlook is the main concern: The larger than expected and broadbased nature of the contraction in 4Q GDP of -1.3%QoQ, is likely to have precipitated the outside-the-schedule adjustment to the outlook. Of interest is S&Ps growth outlook for 2023 of 1.0%, which was revised from 1.5%. Growth is expected to average 1.7% in 2024 to 2026. This is in line with Bloomberg’s consensus. Yesterday, the Governor of the SARB warned that its growth forecast of 0.3% faces downside risk and the growth outlook over the medium term is highly uncertain. (SA has now experienced 151 days of continuous load shedding – the SARB’s model pencils in 250 days in 2023).

Regarding the electricity crisis, there are headwinds. S&P notes the measures to encourage private sector and renewable electricity generation but it will take to time to increase energy supply to the wider economy. The national state of disaster faces risks of possible mismanagement of allocations under fast-tracked procurement processes. And Eskom reports to a multiplicity of ministries that Eskom, including the new Electricity Ministry, DPE and DMRE. The track record of procuring and constructing new electricity to offset breakdowns of the aging coal power stations has been poor.

Fiscal outlook:  Government debt is projected to rise to 78.7% of GDP in FY2026 from 71.5% in FY22. However, S&P believes that fiscal consolidation can continue through 2026 when Eskom’s debt is excluded. The risks are well known, i.e., (1) revenue shortfalls from the economic impact of electricity shortages, (2) government expenditure slippage from higher wage settlements and transfers to SOEs, and a permanent SRD (National Treasury has created an unallocated reserve in FY24 of R40bn if this materialises). 

The FATF grey listing is unlikely to significantly affect South Africa’s creditworthiness since the government retains access to deep domestic capital markets. But the greylisting could increase government’s borrowing costs and raise financial transaction and compliance costs for the economy and trade flows. Non-residents sold R25.5bn of SAGBs in February of which the US repricing of interest rates and SA specific factors such as the greylisting, contributory factors). 

The BB stable rating balances the positives with the negatives:

Positives: Small net external debt position, a flexible currency, deep domestic capital markets, constitutional independent judiciary, an independent central bank, and largely free media. There have been mixed results in strengthening institutions such as SARS, NPA and government-related entities.

S&Ps ratings rev review is scheduled for 19 May and 17 Nov. Moody’s (Ba2 stable no longer publishes schedule dates as the jurisdiction under which it falls has moved to Hong Kong, the same as Fitch.