Ratings agency S&P Global says that while it maintains a stable credit outlook for South Africa, the country’s economic challenges include a heavy fiscal burden and weak economic growth, particularly on a per capita basis.
S&P’s credit score for the country remains three notches below investment grade.
The group’s analyst for emerging markets Ravi Bhatia said during a webinar on Wednesday (7 July), that South Africa could see lowered ratings if the economy fails to recover during the forecast period and fiscal financing or external pressures mount.
“This could, for example, arise from further financing risks emanating from contingent liabilities, including public electricity Eskom, or tightening financing conditions increasing the government’s interest burden as a proportion of revenue,” he said.
Looking at upside factors, Bhatia said that the main focus is on whether president Cyril Ramaphosa and the government implement their proposed reforms. This requires growth at a sustained level over a few years, which could lead to rising GDP per capita and a decrease in debt-to-GDP, he said.
“In theory, South Africa could grow itself out of its fiscal problems and that could assist GDP per capita and the high poverty levels.”
Bhatia said that the country is currently tracking upwards, with the ratings agency forecasting GDP growth of 4.2% in 2021 – higher than government predictions.
“But this starts to taper to between 1% – 2% in the medium-term which is a concern as there is no increase in GDP per capita,” he said.
Bhatia added that long-term problems in South Africa still exist including concerns around Eskom’s power supply, an inflexible labour market, and heavy unionisation.
“This is what kind of limited South Africa’s otherwise really good potential, and we haven’t really seen any (reforms) to push outside of these issues.”
A fiscal problem
S&P said that South Africa’s public finances remain structurally weak, with high fiscal deficits, a large debt burden, and sizable contingent liabilities.
It noted that the 2021 budget aims to combat these fiscal imbalances through restrained consumption expenditures – notably the increased wage bill.
Because of this focus on reduction, the ratings agency said that a number of risks exist, including:
- Wage bill – Proposals to freeze the wage bill could be stymied by strong union presence, and test the alliance between the ruling ANC and trade federation Cosatu.
- Commodity prices – a sharp decline in the prices of key commodity exports – notably gold, platinum, coal and iron ore – could lower incomes and VAT.
- Economic growth – Revenues could fall short of projections if GDP is dampened, for example, a resurgence Covid-19 threat or a shortfall in vaccines.
- State-owned entities – Unanticipated increases in the debts of major SOEs, notably Eskom and South African Airways, which could drive higher surges in government spending.