'SA state finances improved substantially.' S&P, Fitch keep SA's credit rating unchanged

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  • Ratings agencies S&P and Fitch kept South Africa's sovereign credit ratings unchanged. 
  • Fitch notes that state finances have improved substantially, but doubts that government will succeed in freezing public wages. 
  • S&P says the slow pace of reforms and the limp vaccination drive are big risks.

Both S&P Global Ratings and Fitch decided not to cut their rating of South Africa deeper into "junk" on Friday, with the latter noting that South Africa’s state finances have "improved substantially", despite continued "substantial risks to debt stabilisation".

In November last year, Fitch expected that government’s budget deficit would come in at 15.5% for last year – instead it only reached 11.1%. This was thanks to stronger-than-expected tax income and a freeze in public sector wage hikes.

Containing these wages remains key to government's fiscal consolidation plan, but Fitch does not expect that its current proposal to freeze wages will be implemented. "Unions are unlikely to accept that and we assume a wage increase in line with inflation. A higher increase is possible given the trade unions demand a rise by inflation plus 4%."

But Fitch also notes that South Africa’s "external finances have weathered the pandemic well", with strong commodity prices helping the country to achieve a current-account surplus of 2.2% of GDP, the first surplus since 2002. It expects another current account surplus this year.

In addition, it says that foreign investors have returned to the local bond market after large outflows at the start of the pandemic. "Given South Africa's favourable debt structure, with a low share of foreign-currency debt and long-maturities, financing challenges are contained."

But it adds that "exceptionally high inequality" could lead to long-term challenges, and add pressure to government’s attempts to cut spending as there are "rising calls for improving public services".

"In-fighting within the ANC, highlighted by the recent suspension of the party's secretary general (Ace Magashule), also continues to slow down government decision-making."

Fitch kept its rating for South Africa at "BB-" with a negative outlook.

For its part, S&P kept South Africa's long term foreign and local currency debt ratings unchanged at "BB-" and "BB", respectively, with a stable outlook.

It also highlighted the boost of higher commodity prices, but said that structural constraints, a weak pace of economic reforms, and slow vaccination rates will continue to constrain medium-term economic growth and limit the government's ability to contain the debt-to-GDP ratio.

In response, government said in a statement that it plans to accelerate its vaccination rollout programme, with the aim of inoculating five million citizens aged over 60 by the end of June 2021.

It added that government is aware that it needs to fast track growth-enhancing strategies. "Operation Vulindlela [a government-wide programme to implement structural reforms] is a key initiative in this regard and demonstrates government’s commitment to fast-tracking the implementation of critical reforms that raise economic growth and improve fiscal sustainability."

All the major ratings agencies - including Moody's – now rate South Africa's credit rating at junk status, which is below "investment grade". This means they view the State as being at greater risk of defaulting on debt repayments.

Earlier this month, Moody's chose not to issue a ratings action - its next review is scheduled in November.

S&P's next scheduled rating review is 21 November 2021.

Johann Els, Old Mutual Investment Group chief economist, expects ratings agencies to keep a close eye on the medium-term budget policy statement, due in October, to make an "informed decision" about ratings actions.

National Treasury has embarked on a fiscal consolidation path which involves expenditure cuts, particularly targeted at the wage bill.

Tabling his budget vote in Parliament on Thursday, Finance Minister Tito Mboweni said the fiscal framework is "sacrosanct" and the expenditure ceiling cannot be adjusted upwards.

South Africa suffered a record tax shortfall of R175.5 billion in 2020/21, according the minister's speech. Debt servicing costs are set to increase to R269.7 billion this year - crowding out spending for other priorities like healthcare.

Debt is expected to stabilise at 88.9% of GDP in 2025/26.

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