South Africa faces another downgrade decision on Friday

According to Nedbank, Moody’s Investor Services will release its credit rating review for South Africa on Friday (April 1), the first of three rating decisions expected in the coming weeks.

S&P Global Ratings will publish its rating review on May 20, while Fitch Ratings is expected to publish its review around the same time, the bank said in a research note on Friday.

Agencies evaluate several factors that currently indicate maintenance of current ratings, the bank said.

“The National Treasury continues to demonstrate its commitment to stabilizing public finances, which have dramatically deteriorated over the past decade. However, much of its success will depend on the growth trajectory and the government’s ability to exercise spending restraint.

“The government will have to limit the growth of non-investment functions, even if critical, by accelerating and improving the efficiency of investment project spending. This, coupled with more policies to unlock growth bottlenecks in network industries, will increase the growth rate and the ability of the economy to create jobs. “

Nedbank added that the government has little room for maneuver on debt service costs and the pace of fiscal consolidation will depend on curbing the public sector wage bill and reviving economic growth.

“The revised tax reports will help avoid further credit rating downgrades instead of improving the chances of an update in the near future. Even with the lowest figures, South African ratios remain well above the medians of BB-rated government bonds.

“As such, we expect Moody’s and Fitch Ratings to affirm their credit ratings and maintain a stable outlook and S&P Global Ratings to confirm its rating but revise the outlook to stable from negative “.

Nedbank said the three rating agencies are likely to focus on the following issues when issuing their ratings:

  • Macroeconomic reforms – Recently announced policies to boost investment and economic growth are encouraging, but the pace of reform is still slow.
  • Economic growth – In 2021, the local economy was supported by the favorable global environment, benefiting from global demand and high commodity prices. However, domestic demand growth has been relatively subdued, with several one-off and persistent factors disrupting its momentum.
  • The fiscal position – The government remains committed to reducing the budget deficit and curbing the growth of the stock of public debt. Stronger economic growth and higher collections than previously forecast contribute to improving budget ratios over the period of the medium-term expenditure framework (MTEF – 23/2022 to 25/2024).
  • The budget deficit – The deficit will slowly decline and remain well above the median BB of 2.8% 1. Deficit financing will not be a significant challenge due to deep local capital markets and sovereign access to global capital markets. However, the ratio of local currency government bonds held by international investors dropped dramatically below 25%, indicating a tighter investor base.
  • Public sector salary – The 2022 Budget set the growth of the wage bill at 1.8% per year between 2022/2023 and 2024/25.
  • Costs of debt service – The high stock of public debt will increase interest payments by 12.2% to Rand 310.8 billion in 2022/23.
  • Social contributions – The government extended the Social Relief for Distress (SRD) grant in March 2023, costing Rand 44.4 billion in 2022/23.
  • Public debt – The tighter budget deficit helps to contain the growth of the debt-to-GDP ratio relative to the MTEF. The National Treasury expects the ratio to drop to 69.5% in 2021/2022 before steadily increasing to reach a peak of 75.1% in 2024/25 and drop to 70.2% in 2029/30.

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