Government and business leaders have expressed relief at ratings agency Standard & Poor’s (S&P’s) decision on Friday night to not further downgrade South Africa’s investment grade rating, but rather affirm long-term foreign and local currency debt ratings at ‘BB’ and ‘BB+’ respectively.
According to S&P’s, the rating affirmation is underpinned by South Africa’s economic growth remaining tentative and the government’s debt burden continuing on its rising path.
“After the recent political transition, authorities are pursuing key economic and social reforms, but we consider the economic and social challenges the country faces as considerable,” the agency said.
The stable outlook reflects S&P’s view that economic growth will pick up modestly over the next year, while government debt will remain above 50% of gross domestic product.
“The ratings are supported by the country’s monetary flexibility, large domestic financial sector, and deep capital markets, alongside moderate external debt, with low levels of external debt denominated in foreign currency,” stated S&P’s.
In response, National Treasury said it is determined to achieve improved ratings in the period ahead.
“Going forward, government will engage S&P’s on its areas of concern. Taking steps to improve business confidence even further, achieving higher economic growth, fast-tracking the State-owned entity reform agenda and, ultimately, restoring the country’s investment-grade credit rating, remains a top priority,” it said.
Treasury added that recent leadership appointments at entities including Eskom, South African Express, Denel, Transnet, the South Africa Revenue Service and the Hawks, have contributed to S&P’s stable outlook.
The CEO Initiative also welcomed S&P’s decision to retain South Africa’s sovereign debt ratings.
“S&P’s acknowledged that the country’s growth profile is below that of its peers, but believes the recent political transition and policy proposals could support firmer economic growth and stabilising public finances over the medium term. It also considers South Africa’s monetary flexibility, freely floating exchange rate and deep financial markets as credit strengths.
“Earlier this year, S&P’s doubled its growth forecast for South Africa from 1% to 2% on average for 2018 to 2021. We are seeing encouraging signs of progress following several months of hard work from government, labour and business towards the goal of shared and sustainable growth that benefits all who live in the country,” noted CEO Initiative co-convenor Jabu Mabuza.
He added that South Africa should use this window of opportunity by responding appropriately to the significant challenges it faces, to inspire confidence in the future of the country.
Meanwhile, North West University School of Business economist Professor Raymond Parsons pointed out that S&P’s announcement was a reminder that, if linked with the previous decision in March by Moody’s to retain its more positive investment rating and raise its outlook from negative to stable, South Africa continues to avoid universal junk status.
“South Africa, therefore, still has extra time to implement the necessary reforms and to rebuild investor confidence. There remains a formidable national agenda. The single most important challenge remains to turn the economy around and get both the economic growth rate as well as per capita income to much higher levels.”
“This will require growth rates beyond 2% in the years ahead, especially if high unemployment is to be reduced,” Parsons highlighted.
He concluded that what matters now is the next periodic evaluation of South Africa by Moody’s, which usually tends to be more optimistic.
In its March analysis, Moody’s was of the view that the deterioration in South Africa’s institutions would gradually be reversed under the more transparent and predictable policy framework of President Cyril Ramaphosa.
“It is Moody’s that holds the key to South Africa’s continued avoidance of universal junk status,” said Parsons.