South Africa may edge to deeper junk rating if S&P cuts outlook

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South Africa could move toward an even deeper junk credit rating this week by losing the only stable outlook on its debt assessments.

Of the 23 respondents in a Bloomberg survey, 12 expect S&P Global Ratings to change its outlook on the country’s credit rating to negative from stable on Friday. That means the next move from the company, which already assesses South Africa’s foreign-currency debt at three levels below investment grade, could be another downgrade. That would take the country to a single B rating and signal an increased probability of a default.

The nation’s debt assessment is at the lowest level since it first obtained credit ratings 26 years ago. The majority of survey respondents expect Moody’s Investors Service, also on Friday, to leave its assessment at one level below investment grade and they don’t see Fitch Ratings, which is at two levels into junk, downgrading this year.

While that would please Finance Minister Tito Mboweni, who said last month South Africa had already been “punished enough” with downgrades during the coronavirus pandemic, the ratings outlook for next year will depend on the Treasury’s ability to reduce spending, narrow the budget deficit and bring down the debt-growth trajectory.

Mboweni’s mid-term budget last month showed plans to pare the government salary bill that’s surged by 51% since 2008 and is now equal to 11% of gross domestic product. However, that risks a backlash from politically influential labor groups that are already trying to compel the government to honor a previously agreed pay deal through the courts.

The nation’s track record on negotiating wage agreements in line with budget assumptions is weak and there is limited room for offsetting measures in other expenditure areas, Fitch said last month in response to the budget update.

Moody’s could delay “downgrading South Africa now to wait for the outcomes of the wage agreements and to see whether the government is committed to fiscal consolidation,” said Elna Moolman, an economist at Standard Bank Group Ltd. “Any disappointment in this regard could then weigh on the rating early in 2021.”

Further downgrades would increase debt-service costs that are predicted to grow by an average 16.1% over the next three years, complicating fiscal consolidation efforts.

The economy is projected to contract the most in nine decades this year. It’s expected to remain subdued and fiscal consolidation is likely to be slow, Moody’s said last month. The budget failed to detail steps to lift growth and stem the deterioration in public finances, the company said.

“The February 2021 budget will likely give rating agencies a better picture of how realistic the proposed fiscal consolidation could be, and hence they are more likely to take decisive action in 2021 if the fiscal stress shows no, or little, signs of resolution,” said Mike van der Westhuizen, a portfolio manager at Citadel Investment Services.

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