/ 19 February 2018

​Can the budget save South Africa from further credit rating downgrades?

The credit rating is a reflection of how risky an investment South Africa is
The credit rating is a reflection of how risky an investment South Africa is

The future of South Africa’s credit ratings hangs in the balance as the world waits to see what the 2018 budget will deliver.

The budget will be tabled in parliament on Wednesday afternoon when the finance minister is expected to announce plans to plug a mammoth R50-billion hole in revenues, and will also have to provide for other demands – such as free higher education for students from low-income households which is expected to cost up to R15-billion for this financial year.

The plan to address these issues, and many more that weigh on the budget, will provide clarity as to whether South Africa’s credit rating is doomed to be further downgraded into junk territory – or if a grace period will allow for the country to prove it can turn its fortunes around.

“The likelihood of further downgrades of South Africa’s sovereign credit ratings during 2018 appear to be remote in the light of recent political developments, including the election of Cyril Ramaphosa as the new president of the country,” said Conrad Beyers and Riaan de Jongh – academics at the University of Pretoria’s actuarial science department and the North-West University’s centre for business mathematics and informatics respectively.

In fact, according to researchers at the two universities, “current positive sentiment and expectations of economic and political stability should prompt rating agencies to seriously consider upward adjustments of their ratings of South African sovereign debt”.

The credit rating is a reflection of how risky an investment South Africa is, and in turn what average interest rate it pays its lenders.

In April 2017, a few weeks after finance minister Pravin Gordhan was replaced with Malusi Gigaba, Fitch was the first to downgrade South Africa’s credit rate to sub-investment grade aka junk status.

In November last year, “the shocking abandonment of fiscal consolidation as a key policy anchor in the October 2017 Medium Term Budget Policy Statement led to the downgrade to sub investment grade by S&P and the credit watch by Moody’s,” said Johann Els, Old Mutual Investment group’s head of economic research.

If this happened South Africa’s debt would fall out of a prominent global bond and cause large tracker funds to sell off SA bonds.

“Should politics continue to improve and the Budget marks a return to fiscal consolidation, then Moody’s might be willing to postpone a credit rating downgrade and the rand could hold onto its gains,” said Els. Chief executive at the South African Institute of Race Relations, Frans Cronje, said that if a compelling case for growth and fiscal prudence could be made in the budget “the odds of a further rating downgrade fall to below 50%”, he said.