Big test for South Africa

Addressing South Africa’s structural credit weaknesses will take time and determination, which presents a significant test for the country’s ruling coalition.

This is according to rating agency Moody’s, which recently left South Africa’s outlook at stable, which implies neither a credit rating upgrade nor downgrade is currently likely for around the next eighteen months. 

Moody’s rates South Africa one notch above S&P and Fitch at an equivalent BB. The agency also affirmed South Africa’s Ba2 rating.

Moody’s noted that South Africa’s Ba2 rating affirmation is underpinned by its solid institutions, including the long-established judiciary and central bank.

In addition, the agency considered recent confirmation of the effective operation of legislative and executive bodies despite a significant regime change earlier this year.

“The smooth formation of the GNU following the May national elections and its commitment to continuing structural reforms indicate a solid legislative and executive framework,” the agency said.

“The transition to coalition government marked the end of 30 years of ANC ruling, with the DA bringing valuable policy experience from managing South Africa’s most prosperous region, the Western Cape.”

The agency said this experience may enhance policy effectiveness at the national level. 

In addition, the GNU’s more inclusive and cooperative approach to governance and a more pluralistic political climate bodes well for social cohesion.

For example, it pointed to the submission of the Medium-Term Budget Policy Statement only three months after the GNU’s formation as a promising sign of the coalition’s commitment to its fiscal priorities.

In its review, Moody’s also expressed optimism about South Africa’s commitment to fiscal consolidation to preserve debt sustainability despite significant spending pressures.

Investec chief economist Annabel Bishop said February’s 2025 Budget would be the key to S&P reassessing South Africa for an upgrade, but not likely Moody’s.

She said that for Moody’s to upgrade South Africa’s credit rating, the country would need to significantly alleviate the structural constraints on economic activity.

This would not only strengthen the country’s prospects for robust growth but also eventually lead to a reduction in government debt.

However, Moody’s said in its review that addressing the country’s structural credit weaknesses will take time and determination, presenting a significant test for the ruling coalition.

It outlined some other factors the agency would need to see from South Africa to consider a rating upgrade:

• Clear indicators of sustainable improvement in the energy and logistics sectors would be important markers. This would indicate higher growth potential and reduced contingent liability risks from the state-owned enterprise sector.
• A significant and sustained increase in economic investment would indicate that the government’s strategy to encourage the private sector is proving effective.

While there is some light at the end of the tunnel with a potential rating upgrade, South Africa is not off the hook yet.

Moody’s warned that South Africa could still be downgraded if the country’s economic growth prospects further deteriorate, coupled with a persistent decline in its fiscal strength.

“This could occur due to setbacks in implementing structural reforms, particularly those aimed at improving the energy and logistics sectors,” the agency said. 

“Such setbacks might result from political divisions and/or instability within the governing coalition, leading to considerable policy uncertainty and impeding the advancement of crucial structural reforms.”

“Signs that the state-owned enterprises sector requires financial assistance far exceeding our current expectations, thereby hindering the government’s fiscal consolidation efforts, would also place pressure on the rating.”

When it comes to South Africa’s finances, Moody’s said that its projections for the country’s debt levels are slightly less optimistic than the National Treasury’s expectations.

The government expects South Africa’s debt to stabilise at 75.5% of GDP in fiscal year 2025. 

However, the rating agency expects the consolidated government debt-to-GDP ratio, including some government guarantees to state-owned enterprises, to stabilise at around 80% of GDP over the medium term.

“Despite better market conditions, the government expects debt affordability to worsen slightly due to lower revenues,” it said. 

The agency said the fiscal slippage is noted, and further slippage in 2025 could threaten Moody’s rating of South Africa.