Fitch raises forecast for SA, but don't expect a higher rating just yet

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SA's rating remains at BB- with a negative outlook for the time being.
SA's rating remains at BB- with a negative outlook for the time being.
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  • Credit rating agency Fitch says SA's budget deficit in the fiscal year ending in March 2022 would likely be an improvement on projections from February this year.
  • This is owing to a "robust economic performance" and stronger-than-expected fiscal revenue in recent months.
  • That said, SA's rating remains at BB- with a negative outlook for the time being. 

Credit rating agency Fitch has raised its forecast for SA's economic growth and said the country's budget deficit for the fiscal year will likely be smaller than government's earlier projections.

But this doesn't mean a positive ratings adjustment is on the cards yet, it said. 

In a statement on Tuesday, Fitch revised its earlier forecast of 4.9% growth in 2021 up to 5.3%. It further said a "robust economic performance" and stronger-than-expected fiscal revenue in recent months meant SA's budget deficit in the fiscal year ending in March 2022 would likely be an improvement on projections from February this year.

It warned that government would still face "substantial challenges" in its battle to stabilise debt by 2025/26.

These include the prospect of possible further bailouts to troubled state-owned enterprises, and pressure placed on the public purse by the July riots in KwaZulu-Natal and parts of Gauteng.

"[T]he social unrest in July has increased pressure on the government to raise support for the poor - pressure that could rise further if the ruling African National Congress [ANC] performs poorly in municipal elections in November," Fitch said.

"The ANC leadership has agreed on the need for a basic income grant in principle, for example, although we believe its cost will make implementation unlikely in the next few years. Higher social spending, if introduced, could be offset by revenue measures, but these might not fully cover expenditure, and could weigh on economic growth."

But the agency said it expected a strong recovery in activity after the July unrest – which a Sasria executive flagged as the most expensive blitz riot the world had seen in a decade – which it attributed in part to an uptick in manufacturing activity.

"The August 2021 manufacturing purchasing managers' index (PMI) and mobility data point to a strong recovery in activity following disruption in July caused by the most serious riots in decades," Fitch said.

The rating agency noted that the consolidated budget deficit was likely to be "significantly smaller" than the 9.3% projected in the February budget, but that fiscal support extended after the riots would mean a little less breathing space.

It also said inflationary pressures appeared under control. 

"Meanwhile, inflationary pressures appear manageable, with y/y consumer price inflation falling to 4.6% in July, close to the 4.5% mid-point of the central bank’s target range. We believe interest-rate hikes over the coming years, and thus upward pressure on interest expenditure, will remain relatively contained," the statement said.

While tax collection had been heavily impacted by the hard lockdown in 2020, Fitch noted that fiscal revenue had seen a 54% increase year-on-year for the first four months of 2021/22 – though this is expected to level out for the rest of the year.

Recent strong revenue from mining is also expected to slow as the commodity price environment becomes less favourable, Fitch said.

Fitch affirmed SA's rating at BB- with a negative outlook in May. It said at the time that a positive rating action might be triggered by progress in key areas that would increase its confidence that government debt/GDP stabilisation could be achieved in the medium term.

But in its statement on Tuesday, it said it was still "unclear" whether positive developments it had outlined would be sustained.

SA saw an improvement in its key fiscal metrics in August, with its GDP standing at 11% higher than previously estimated. This had a positive impact on the country's debt to GDP ratio, lowering it from 79.3% from 82.5%.

But, Fitch pointed out, "it remains well above the 2020 median for 'BB' sovereigns of 59%".

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