Moody's upgrades South Africa's outlook from ‘negative’ to ‘stable’

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  • The credit rating agency Moody's upgraded its outlook on South Africa from "negative" (which meant the next step could potentially be another downgrade) to "stable".
  • While government bonds are still rated as "junk", Moody's says South Africa's fiscal position has "markedly recovered".
  • It praised the state's ability to keep growth in the public sector wage bill to below inflation. 

The credit rating agency Moody's upgraded its outlook on South Africa from “negative” to “stable”.

Moody’s previously rated South Africa at Ba2 (two rungs below investment grade), with a negative outlook – which means the next step could potentially be another downgrade.

It is keeping South Africa at Ba2, but changed its outlook to “stable”, saying that South Africa's fiscal position has “markedly recovered” from the pandemic thanks to high commodity prices, which boosted tax revenue, and government's fiscal consolidation measures, including that it was able to keep growth in the public sector wage bill to 1.6%, well below inflation.

“Indeed, over the last two fiscal years, the government has shown it was able to re-prioritise its spending while staying committed to fiscal consolidation, which Moody's expects will remain the case going forwards.”

In 2020, Moody’s stripped South Africa of its investment grade rating, downgrading government bonds to "junk". A "junk" rating means there's a bigger chance that the government won’t be able to pay back its debts.

"This marks an improvement compared to Moody's previous projections of a long period of ever-rising debt-to-GDP."

Government has managed to cut its primary deficit (the difference between its income and spending, excluding interest payments) to 1.3% of GDP over the past year, compared to Moody’s forecast of 3.4%.

Moody’s also expects that tax compliance is likely to improve gradually as the South African Revenue Agency (SARS) rebuilds some of its institutional capacity, and highlighted South Africa's “sound” financial sector, as well as strong exports thanks to commodity prices.

In addition, it noted that the Reserve Bank's foreign-exchange reserves fully covered annual external debt payments. “The central bank has a long-standing policy of refraining from intervening to prevent depreciation, thereby preserving buffers.”

But it warned that the state-owned enterprises (SOEs) remain weak and poses risks to government’s debt burden. In addition, a “malfunctioning” labour market could fuel “social risk” and Moody’s is also concerned about the impact of load shedding on the economy.

“Moody's expects these constraints to remain and forecasts GDP growth at only about 1.5% in the medium term.

“Very weak SOEs across a number of sectors, including electricity and transport, both contribute to weak growth and are affected by it, without any prospects of significant improvements in the foreseeable future.”

Still, it said that South Africa’s ratings could be upgraded if it showed significant progress towards alleviating these structural constraints on growth. "Firm signs that the rehabilitation of the energy sector is underway would also be a key marker, pointing to higher growth and lower contingent liability risks from the SOEs sector."

Ratings could be downgraded if growth prospects and government’s fiscal strength deteriorated.

In a statement, National Treasury welcomed Moody’s upgrade to South Africa’s outlook.

It said that government is using a part of its additional tax income (a windfall due to the high commodity prices) to pay off more debt, while most of it will go towards urgent social needs, including job creation through the presidential employment initiative, and supporting the public health sector.

“Faster implementation of economic and SOC [state-owned corporation] reforms, accompanied by fiscal consolidation to provide a stable foundation for growth, will ease investor concerns, and support a faster recovery and higher levels of economic growth,” Treasury said.

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