Downgrade warning for South Africa

South Africa’s risk of credit rating downgrades remains relatively high as seen by a ramp-up in borrowings, with fractured politics pulling in different directions exacerbating the difficulty government has in overcoming structural constraints, says Investec chief economist Annabel Bishop.

In November 2020, Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative.

In the same month, ratings agency Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.

In a research note published this week, Bishop said that the ruling ANC has attempted to move quicker on structural reforms, but opposition to this from both inside and outside the party has seen little actually occur in moving the country into a freer market state needed to accelerate business dynamism, and so erode unemployment.

“While the government has made some progress in improving the ease of doing business and has also made inroads into the repair and rebuilding of many SOE’s and government institutions hollowed out by state capture, the enormous damage makes it a lengthy, ongoing task,” she said.

“Consequently, Fitch is reported to have said it expects South Africa to see weak gains in tackling the very high unemployment rate, particularly for youth, given the many structural constraints to job creation, including the poor educational system.”

Fitch expects South Africa’s unemployment rate to average 29.9% over our long-term forecast period to 2030, due to problems in the education system and labour market rigidities.

It also expects a deterioration in South Africa’s fiscal situation, projecting gross government debt to reach 82.9% of GDP by 2026, increasing from 69.4% of GDP in 2020, which it said would negatively affect the economy and lengthen the path to achieving investment grade again.

Fitch said that while it expects some progress, as the government has allowed private power generators to provide more capacity, most of these additions would only begin in the second half of 2022 which means the economy would continue to see power supply constraints in the interim.

Consequently, Fitch expects GDP growth of 2.5% y/y for South Africa next year, after its rebound of 5% y/y this year, with a slowdown in global economic growth likely next year which would detract from South Africa’s performance as well.

Read: South Africa’s mid-term budget postponed to 11 November

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Downgrade warning for South Africa