South Africa’s renewed commitment to fiscal consolidation, mining windfall revenue and an upward revision to gross domestic product should help it avoid a deeper junk credit rating on Friday and put it on track to regain at least an investment grade assessment in the decade.
Sixteen of the 18 economists surveyed by Bloomberg expect the country to avoid another downgrade from Moody’s Investors Service on Friday. Ahead of the better-than-expected budget, the company’s negative outlook on South Africa’s foreign currency debt suggested its next step might have been an additional haircut, a move that would have aligned its assessment with those of S&P Global Ratings and Fitch. Ratings.
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S&P is also unlikely to change its assessment in a review scheduled for the same day. Similarly, South Africa is expected to avoid another downgrade from Fitch, which also has a negative outlook on its rating, according to 94% of respondents.
While South Africa’s finances remain unstable, Finance Minister Enoch Godongwana’s commitment last week to control debt, reduce loan servicing costs, reduce the budget deficit and cut spending in the coming year should help. to strengthen investor confidence. The medium-term budget was the clearest signal yet that the ex-unionist and head of economic transformation in the ruling African National Congress will not give in to calls to cut austerity measures.
What Bloomberg Economics Says …
“We do not see another downgrade unless there are major shocks. But the bar for upgrading is really high. It is possible that the Treasury will comply by the end of the decade if it sticks to the consolidation plan outlined in the budget, but risks abound. ”
– Boingotlo Gasealahwe, African economist
The budget showed a narrower path to a primary surplus, where revenues are higher than expenditures without interest, and a more rapid reduction in the fiscal deficit. This is partly due to significantly higher tax collections from mining companies that benefit from high commodity prices and the state’s decision to use some of the money to pay off debt.
A review of statistics showing that Africa’s most industrialized economy is 11% larger than previously estimated means that debt is now forecast to peak at 78.1% of GDP, almost 10 percentage points less than what the government estimated in February, fiscal year 2026. Debt service costs, the fastest growing spending item since 2011, will continue to rise, peaking at 5.3% of GDP in the same year.
The rating companies “are likely to share the general concern of investors that debt stabilization will remain a challenge until trend growth is credibly and sustainably higher, particularly given the high demands for poverty alleviation. “said Elna Moolman, a South African economist at Standard Bank Group Ltd.
South Africa’s economy is stuck in its longest downward cycle since World War II and has grown less than 3% annually since 2012. While production is expected to return to pre-coronavirus pandemic levels by the end of next year , that is unlikely to be enough to create enough jobs in a country where more than a third of the workforce is unemployed and cope with poverty in one of the most unequal societies in the world.
So far, Godongwana has resisted calls from civil society groups to increase social spending and for the introduction of a basic income subsidy, a policy that business organizations say is unaffordable. Instead, he said he would push to develop a “track record of implementation” of reforms that improve economic growth, particularly in infrastructure.
While the efforts of Godongwana’s predecessors to introduce policy changes have been stalled by powerful vested interests, the government is targeting the success of the reform by mid-February. That should influence Moody’s and Fitch to update their outlook to stable towards the end of next year, Godongwana said.
Only 11% of economists surveyed by Bloomberg expect any of the three rating companies to improve their assessment of South Africa in the next 12 months. More than half of the 16 who responded to a separate survey question predict that the country will regain an investment grade rating from at least one of the top three companies within five to eight years.
South Africa would need to regain at least an investment grade rating from Moody’s or S&P to re-enter the FTSE world government bond index, which could increase portfolio inflows and further reduce borrowing costs. Still, the country’s sovereign risk premium, a measure of the higher cost investors pay to hold South Africa’s debt, will improve to 3.1% in 2023 from 3.5% this year, according to National Treasury estimates.
© 2021 Bloomberg