Credit rating agencies Moody’s Investor Services and S&P Global Ratings are expected to release their rating reviews for South Africa on 7 May and 21 May respectively – with Nedbank analysts warning that further downgrades are likely.
In a research note published this week, Nedbank said that Fitch Ratings does not provide release dates as its analyst is based outside the European Union, but its review is also due at about the same time as the others.
Commenting on its expectations for the reviews, Nedbank said that the three agencies adopted cautious responses to this year’s budget, warning that the National Treasury set a challenging fiscal roadmap.
The budget deficit and public debt targets are based primarily on an economic rebound and containing the public sector wage bill. Both these drivers face significant downside risks.
The balance of factors points to imminent rating downgrades deeper into sub-investment grade, Nedbank said. However, the bank’s analysts said rating agencies are likely to hold off until the public sector and Eskom wage talks have been finalised.
“S&P Global Ratings and Fitch Ratings will be reluctant to move a country with reasonably solid institutional governance and deep local financial markets below the psychological hurdle of a B rating.
“This hesitancy is likely to delay further downgrades for at least a year. Moody’s and Fitch Ratings downgraded their ratings in November 2020, which may persuade them to adopt a ‘wait-and-see’ at least until the 2022 budget.
“However, a deterioration of economic prospects would increase the chances of further downgrades during this year.”
To improve the country’s ratings, the government must tackle the longstanding macroeconomic challenges head-on. First, stabilise government finances, Nedbank said.
“Second, restore the state-owned enterprises to good financial health. This will reduce the burden on the fiscus and the risks posed by the high contingent liabilities. Third, eradicate power shortages by stabilising Eskom and prioritising the licensing of renewable power projects.”
These three steps will lift confidence, facilitate greater fixed investment by the private sector and ultimately stimulate job creation, Nedbank said.
South Africa’s expenditure reduction is anchored on containing the public sector wage bill over the next three fiscal years.
The government plans to increase the wage bill by an average of only 1.2% per year over 2021/22 to 2023/2024, while the 2020/21 wage freeze is still subject to a Constitutional Court judgement.
Public sector unions entered the wage talks with a demand of CPI plus 4%, which has resulted in a deadlock, Nedbank said.
“Based on the 2020/21 public sector wage bill of R574.4 billion, meeting the unions’ demands will add R274.3 billion (15.6%) to the envisaged wage bill over 2021/22 to 2023/2024, assuming a steady public sector workforce and a 4.5% annual CPI rate.
“If the Constitutional Court rules in favour of the unions, R37 billion will be added to the 2020/21 wage bill. Additionally, Eskom has started wage talks with unions demanding a 15% per year hike for three years.
“If granted, although this is highly unlikely, the high wage increases will exert further fiscal pressure in the form of higher bailouts for the financially constrained electricity utility.”