SA's sovereign rating may avoid being downgraded to junk
South Africa’s credit rating will probably not be downgraded to junk, at least not for the next two years, said credit ratings agency Standard & Poor’s (S&P) on Monday.
“The outlook is currently stable, the time horizon is usually 24 months,” said Christian Esters, senior director of sovereign ratings at Standard & Poor’s. “We don’t expect the rating to change at least over the next 24 months.”
This optimism from the agency is despite electricity cuts that are expected to chip away at economic growth and ongoing public sector wage negotiations that, depending on the outcome, could break the budget.
For regulatory reasons Standard & Poor’s reassesses South Africa’s credit rating at six-monthly intervals and will announce a rating decision in June this year.
There has been concern about S&P’s ratings decision in particular as it last downgraded South Africa’s sovereign rating – which is now one notch away from junk status.
If downgraded to junk, many institutional investors (as per their investment mandates) would be obliged to sell South African government debt and the cost of borrowing for the country will probably increase.
“The outlook is stable.
At this point we cannot give anymore indication on whether it will move,” said Esters, speaking at a press briefing in Johannesburg.
But, he noted, of the two downgrades S&P has bestowed upon South Africa in the past, “in each case we did have a negative outlook before … From today’s perspective; the more likely scenario is that rating will not change.”
Esters said South Africa’s key strengths and vulnerabilities had not changed fundamentally over the past few years.
He said institutions in South Africa remained strong while “fiscal debt over GDP we still think is moderate, although on an increasing trend”. He said the independence of the South African Reserve Bank was a plus, as was the free-floating exchange rate which provides a cushion and an absorber of external shocks.
Esters said public sector wages and the possible need to provide funding to the electricity sector posed risks to the fiscal outlook.
He said the agency would monitor how the energy shortage affected growth in the medium term and whether it lowered revenues or affected investor confidence or exports. “Our understanding the purpose [of treasury support to Eskom] is not to increase the deficit, which is a supportive factor for the sovereign rating,” said Esters.
Treasury has budgeted for a wage settlement to be in line with inflation despite a demand of 15% from the civil servant unions.
“In a scenario where it is above that [inflation] it is most likely treasury will take measures elsewhere to compensate for that. Perhaps they will cut capital spending. We think the headlines numbers will not be affected; but the structure of spending would change, which would not necessarily be positive for growth.”
Esters said the wage settlement could play out as one of many factors that would affect growth.