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Ok. Got itThe table below illustrates a summary of SA’s current sovereign credit rating. All three ratings agencies have the country’s sovereign debt at below sub-investment (‘junk’) grade. Fitch and Moody’s downgrade of SA’s foreign and local currency ratings by one notch deeper into the sub-investment territory, coupled with the negative outlook on these ratings, risks further downgrades over the next 12 to 18 months.
Foreign currency | Local currency | Outlook | |
S&P Global | BB- (3 notches below *IG) | BB (2 notches below IG) | Stable |
Fitch | BB- (3 notches below IG) | BB- | Negative |
Moody’s | Ba2- (2 notches below IG) | Ba2 | Negative |
*Investment grade |
There are significant upside risks to government’s borrowing costs and SA’s weaker credit profile also means that government will have to either cut back on social spending or tax a shrinking tax base even more.
Reading through the rating commentaries, one is left with the sense that SA is now long past the point where the agencies will give SA the benefit of the doubt on growth reforms and fiscal consolidation. It appears SA is in a situation of having to deliver on promises before the rating agencies will even consider shifting the needle on their current assessments on the country. Unfortunately, history has shown that the country has a track record of under delivery on issues regarding the speedy implementation of growth enhancing structural reforms.
This has raised doubts in the minds of rating agencies. Fitch argues that the reforms may have a limited impact and are likely to take time for the positive effects to accumulate. Moody’s statement flagged the same factors as Fitch, although the main difference was that Moody’s placed a large emphasis on the adverse impact of COVID-19, stating that the effects may continue to linger a while longer and are likely to be a significant drag on the county’s growth and fiscal balances. The rating agency argues that while SA is not unique in having been affected by the ravaging effect of COVID-19, because SA already suffered from glaring fiscal, economic and social constraints before the pandemic, this may limit the country’s capacity to mitigate this extraordinary shock in the medium term.
In addition, higher fiscal deficits and a faster rise in overall government debt than outlined in the Medium-Term Budget Policy Statement (MTBPS) last month is very probable. With one of the key concerns being whether government can stick to what is effectively a public sector wage freeze. There is a real risk that government may ultimately need to reverse the decision not to honour the final year of the 2018 public sector wage deal as outlined in the MTBPS. The outcome of the legal process (first court verdict is set to be delivered in early December) remains uncertain.
While S&P emphasised the same apprehensions as Fitch and Moody’s, it maintained that the stable rating outlook was supported by several strengths the country has, such as:
According to the credit rating agency, these factors should assist in offsetting the country’s low economic growth and fiscal pressures.
It also noted that the countries legal system was standing up strongly and the independence between state and the judiciary was sound. A recent example of this was when just this week the Deputy Chief Justice and chairperson of the Commission of Inquiry into State Capture, Raymond Zondo, instructed the commission’s secretary to lay a criminal complaint against former President Jacob Zuma with the South African Police Service. Judge Raymond Zondo stated he would open a criminal case against former president Jacob Zuma for walking out of the state capture inquiry last week without prior permission. It was done for Zuma to avoid having to take the stand and face questioning as he was required to do. This could be perceived as a positive and clear message that the institution is serious about upholding its integrity.
While this does reaffirm the strength of the judiciary, it is the strength of the country’s balance sheet that remains a huge pressure point. We shall watch this space closely, and the government’s determination to tackle structural economic reform and changes.
The Nedgroup Investment Multi-Manager Team