One thing stopping South Africa’s escape from junk status

South Africa is making progress towards an upgraded credit rating, but fiscal slippage could threaten this improvement.

This is according to Bank of America’s latest report, South Africa: Ratings Upgrade? Seeing is Believing, which examined South Africa’s economic trajectory amid a potential ratings upgrade.

Two major credit rating agencies, S&P Global Ratings and Fitch Ratings, downgraded South Africa to ‘junk status’ in 2017.

Today, South Africa’s credit rating is currently considered “junk” or “non-investment grade” by major credit rating agencies like Fitch, S&P, and Moody’s. 

This means that investing in South African government debt is considered riskier compared to countries with higher credit ratings.

Before the downgrade, all three major credit rating agencies considered South Africa investment grade. Investment grade status indicates a lower risk of default and is generally more attractive to investors.

Several factors contributed to the country’s downgrade, including its high debt levels, slow economic growth, political instability, and social challenges like poverty, inequality, and unemployment.

While many of these challenges are still present, South Africa has taken significant steps to claw back a higher credit rating and is closer than ever to achieving this goal.

Bloomberg recently reported commentary from Goldman Sachs, which believes South Africa is unlikely to suffer the large revenue shortfall its Finance Minister projected and that the country’s path for fiscal consolidation remains credible.

Finance Minister Enoch Godongwana recently presented the Medium-Term Budget Policy Statement (MTBPS), which painted a bleak picture of the country’s finances, including a slightly wider deficit.

South Africa achieved a primary budget surplus for the first time in years, but the government’s immense debt budget means the country will still run a main budget deficit.

In addition, Godongwana revealed that the National Treasury expects a R22 billion gap in tax revenue, widening the deficit to 5% of GDP from 4.5% projected in February.

This is a far higher estimate than the R12 billion gap many economists expected.

Despite this caution, Goldman economist Andrew Matheny said South Africa remains on track to stabilise debt and bring it below 70% of GDP by the end of the decade.

Bloomberg reported that Goldman sees scope for a possible improvement in South Africa’s sub-investment-grade credit ratings within six months. 

While it may not happen that soon, Matheny said a positive outlook remains on the cards.

Fitch Ratings and Moody’s Ratings may review South Africa’s assessment following the release of the Budget Update, while S&P Global Ratings’ assessment is due on November 15.

Many factors work in South Africa’s favour for a credit upgrade. GNU confidence, limited load-shedding, and promises of further reforms point to a potentially improved economic outlook.

Furthermore, low inflation and a rate-cutting cycle should buoy investment and consumption in the country.

The Bank of America report said derived ratings from market-implied credit spreads suggest South Africa is trading as a BB, which is aligned with Moody’s (Ba2/stable) but lower than Fitch (BB-/stable) and S&P (BB-/stable).

It said ratings upgrades are likely to follow should South Africa deliver higher GDP growth and a decline in its debt-to-GDP ratio over the next three years.

However, this is where the problem comes in. The report explained that while South Africa’s trajectory is positive, the MTBPS reminds us of what underpins rating agencies’ misgivings – concerns with economic underperformance and structurally weak public finances. 

Bank of America’s Sub-Saharan Africa economist, Tatonga Rusike, said the country’s fiscal slippage was slightly negative relative to expectations. 

Fiscal slippage happens when a government spends more money than it initially planned, which can lead to bigger budget deficits and more debt.

In the MTBPS, Godongwana revealed that this year’s expenditures will increase compared to the government’s estimates in February.

Over the medium term, consolidated expenditure is expected to increase from R2.4 trillion in 2024/25 to R2.8 trillion in 2027/28. 

While Bank of America believes that the new framework laid out in the MTBPS is more realistic and builds buffers to avoid further slippage, it said credit rating agencies are less likely to flag any potential upsides in the near term. 

“The 2025 Budget will need to demonstrate a grip on spending with risks from higher wage settlements, the SRD grant, and Transnet support, among others,” the report said.

“We are cautious on near-term rating upgrades given fiscal slippages in the MTBPS.”