South Africa’s junk status battle

South Africa’s credit rating plummeted over the last decade, and the country risks going deeper into junk status.

Credit ratings are a third-party assessment of the creditworthiness of an entity. It gives investors a sense of the entity’s willingness and ability to repay debt in a timely manner.

Credit ratings for a country are an important consideration as it affects foreign investment and interest on capital invested.

If a country’s credit rating deteriorates, it negatively impacts foreign investment. It can also result in investors divesting from the country.

A credit rating decline will also increase the interest burden on the country’s finances. In turn, it can result in a bigger tax burden on citizens without an increase in service delivery.

South Africa has seen a significant decrease in credit quality from 2012 to 2022. During this period, its S&P Global credit rating fell from a BBB+ rating to a BB- rating.

This translates to a drop from being on the brink of having high-grade credit quality to falling into speculative grade, also known as junk status.

In 2017, South Africa fell to speculative credit grade for the first time since the nineties.

Their mandate prohibits many offshore bond investors from investing in speculative debt instruments. This caused South Africa to experience a significant decrease in foreign investment in domestic bonds.

The percentage of domestic bonds owned by foreign investors fell from 41% in 2017 to only 25% in 2022, showing that South African bonds became too risky for many foreign investors.

In the same period when South Africa’s credit rating fell from BBB+ to BB-, South Africa’s interest burden increased.

South Africa’s interest expense on government debt increased from 11% of tax revenue in 2015 to 18% in 2022.

The higher interest expense is due to a combination of overall higher levels of debt – debt to GDP – and higher cost of debt due to South Africa’s higher credit risk.

It shows the impact of a credit rating downgrade on the South African economy and in accessing foreign investment.

South Africa’s credit rating versus other countries

The table below shows a sample of countries with their credit ratings in relation to South Africa.