Standard & Poor’s Global Ratings late on Friday night affirmed South Africa’s credit ratings, keeping the country’s rand debt at "BB+", the first notch of sub investment grade, and SA’s foreign-currency debt at "BB", the second grade of junk status.
S&P, one of the three largest international ratings agencies acknowledged the reforms being undertaken by President Cyril Ramaphosa’s administration but flagged “considerable” challenges to improving the country’s financial position.
Rival ratings agency Moody’s kept SA at investment grade in March and changed its outlook to stable, expressing confidence in Ramaphosa’s ability to turn the country around.
Fin24 took a look at the reasons behind S&P’s cautious approach to “Ramaphoria”.
Weak per capita growth
“South Africa's economic growth, on a per capita basis, is below that of emerging market peers,” according to S&P.
S&P forecasts stronger economic growth, on average of at least 2% over 2018-2021 but this will translate into below 1% growth per capita (average per person).
This puts SA’s per capita economic growth second lowest amongst 20 emerging market economies with only Qatar expected to grow slower than SA.
S&P believes that SA faces “significant challenges” due to high levels of poverty, unemployment, and economic inequality, mostly along racial lines.
In light of this, according to the ratings agency, a political debate took place over land which resulted in a parliamentary committee being established to assess whether the constitution should be changed to allow for expropriation without compensation.
S&P said that it is still too early to tell how the process will unfold, but they expect the rule of land to be maintained and changes to the country’s land policy will not hamper investment.
Weak fiscal position
S&P expressed concern about the state of SA’s public finances but acknowledged that government is taking steps to reduce the fiscal deficit and the pace of debt accumulation.
The ratings agency highlighted the measures in the February budget speech which included raising the value-added tax (VAT) rate to 15% from 14% and making some reductions in expenditure items such as infrastructure grants to schools and municipalities.
“We estimate that the annual change in net general government debt will average 4.5% of GDP per year over 2018-2021. As a consequence, we project that net general government debt to GDP will increase to around 52% net of liquid assets by the fiscal year ending March 2021,” S&P noted.
According to the ratings agency, debt-servicing costs will remain close to 12% of revenues and risks still remain to public finances in the form of higher public sector wage agreements than budgeted, and potential unbudgeted support to state-owned enterprises (SOEs).
Economy vulnerable to global investor sentiment
The majority of South Africa's government debt is in rands, with only 10% in foreign currency and according to S&P, this shields public debt from exchange rate shocks.
However, 40% of government’s rand denominated debt is held by foreigners or international institutions and S&P points out that while this can lower the government’s cost of debt, it makes the economy vulnerable to global investor sentiment.
Both SA’s rand denominated debt and foreign currency debt are rated as sub-investment grade or junk status, by S&P.
S&P views Treasury’s guarantees to SOEs and its contingent liabilities as “sizable”.
“This reflects the increased risk that nonfinancial public enterprises (NFPEs) could require further extraordinary government support than currently provisioned.”
S&P is also concerned that reforms to improve parastatals' financial positions might not be comprehensive or undertaken soon enough.
The ratings agency estimates that overall public sector debt (including national, municipal and SOEs) will stand at 70% of GDP in 2018.* SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.