On 12 June 2015, Standard and Poor’s Ratings Services decided to leave South Africa’s international credit rating unchanged at BBB-, with a stable outlook. This was in-line with market expectations. A year ago Standard and Poor’s downgraded South Africa’s credit rating to BBB-, which is only one notch above speculative grade (“junk status”). See chart attached. The stable outlook reflects S&P’s view that a slight improvement in GDP growth in 2015-2018 and ongoing fiscal prudence will help contain South Africa's fiscal and external balances within their expectations.
In making the latest decision to leave SA’s credit rating unchanged, Standard and Poor’s highlighted the following key factors:
- Real GDP growth in South Africa is expected to be limited to 2.1% in 2015, owing to electricity supply shortages among other factors.
- There is expected to be a slight acceleration in GDP growth to an average of 2.7% per year over 2016-2018 due to an increase in electricity generating capacity, domestic consumption, and rising net exports.
- The improvement in growth in 2015-2018 will also depend on wage negotiations in the gold and coal sectors, among others, not leading to prolonged strikes.
- Continued shortages of electricity could jeopardize any possible recovery.
- South Africa’s rating is constrained by the need to fund the country’s sizable current account deficit, although this could narrow from 2014 levels in 2015-2018, owing to the fall in global oil prices as well as a rebound in exports.
- Although the rand floats and is an actively traded currency the portfolio and other investment flows that finance these deficits can be volatile.
- Capital outflows could result from global changes in risk appetite or from foreign investors reappraising prospective returns in the event of growth or policy slippage in South Africa, or rising interest rates in advanced markets.
- Tax increases, alongside the recent wage settlement for public sector workers, should help limit fiscal risks in 2015-2018, and S&P expects the treasury to stick to its pledged hard expenditure ceiling.
- Lower-than-forecast growth and other factors may reduce revenues and obstruct fiscal targets. The 2015/16 budget has facilitated higher revenues through a hike in income tax and fuel levy, while continuing to maintain a strict control on expenditures.
- General government debt, net of liquid assets, increased to 41% of GDP in 2014 from 22% in 2008, and S&P expects it to reach 44% by 2017.
- Although less than 10% of the government's debt stock is denominated in foreign currency, nonresidents hold about 35% of the government's rand-denominated debt, which could make financing vulnerable to foreign investor sentiment.
- The government has R350 billion - about 8% of GDP - available in potential guarantees for the state-owned power utility Eskom. Eskom currently uses about R150 billion of these guarantees.
- Eskom's operating margins have been hurt by low tariffs over many years, although the regulator recently permitted a 13% hike.
- Eskom's funding needs might affect the contingent liability estimate in the future.
- Further planned electricity price hikes may help Eskom's finances and mitigate risks.
- South Africa will experience continued broad political and institutional stability and policy continuity.
- While S&P thinks that President Jacob Zuma's second administration will continue the policies of his first administration, which controlled fiscal expenditure, the government has so far not undertaken key labour market and other economic reforms that are likely to significantly boost GDP growth.
- S&P does not believe the government, led by the African National Congress (ANC), will pursue radical policies, such as the nationalization of mines.
S&P could lower the ratings if external imbalances increase, or funding for South Africa's current account or fiscal deficits becomes less readily available. They could also lower the ratings if South Africa's business and investment climate weakens, for instance if labour disputes escalate again or GDP growth weakens significantly; if significant electricity shortages persist; or if political tensions increase
Overall, although reform efforts remain lackluster, GDP growth low, current-account-deficit financing needs relatively high, general government debt sizable, and external financing flows potentially volatile, S&P has given South Africa credit for the government’s commitment to fiscal prudence and an expectation the growth rates will improve once the electricity constraint is relieved.
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