South Africa faces big credit rating decision this week
Credit rating agency S&P Global is expected to publish its review for South Africa on Friday (21 May), in what could be another test for the country’s economy.
In a research note published on Monday, Nedbank said that S&P is likely to maintain a BB- rating with a stable outlook.
“The external rating agencies are likely to review their ratings before the next scheduled round of reviews in November 2021 if the public sector wage negotiations are settled at a level that will impose a higher spending commitment on the fiscus,” the bank said.
“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 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,” it said.
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, Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.
Wait and see
While agencies look to adopt a ‘wait and see’ approach around the wage negotiations, they remain largely unconvinced about the government’s efforts.
In a note last week, Fitch said that government is unlikely to meet its goal of freezing public-sector wages over the next three years.
The firm said that the government’s inability to control spending would likely lead to further budgetary issues.
“Compensation of public sector workers accounts for a large share, about 35%, of government expenditure,” it said. “Ongoing negotiations on a new wage deal are likely be difficult and the government is unlikely to meet its target of agreeing on a wage freeze, leading to the risk of expenditure overruns.”
It forecast that South Africa’s GDP growth is likely to remain below 2% due to the limited scale of planned structural reform, adding that ongoing issues such as government’s weak implementation record and electricity shortages will continue to hinder efforts.
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.
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