Fitch Ratings has unexpectedly improved its outlook on South Africa’s credit rating, providing respite as the nation grapples with the economic damage caused by a fourth wave of coronavirus infections.
The company maintained the nation’s foreign and local currency ratings at BB-, three notches below investment grade, and changed the outlook from negative to stable. The measure reflects “the faster-than-expected economic recovery, surprisingly strong fiscal performance this year, and significant improvements in key credit metrics based on gross domestic product” after the nation made changes to the way tax is calculated. GDP, Fitch said in a statement Wednesday.
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“It is recovering and GDP now appears to be on track to return to pre-pandemic levels during 2022, despite a 1.5% quarter-on-quarter contraction” in the third quarter, triggered in part by the violent riots in July, Fitch said. The agency expects the economy to grow 4.7% this year, 2% in 2022 and 2.4% in 2023.
“The pandemic continues to affect economic performance and continues to be a source of downside risk to public finances, but the probability of serious negative effects on credit quality has decreased over the last year”, despite the appearance of the variant omicron and the rapid increase in new cases in South Africa, he said.
While he hopes that measures to curb the spread of the virus will be toughened, he assumes that they will be short-lived and specific, and will mainly affect the hotel industry rather than economic activity in general.
The change in perspective comes a year earlier than Finance Minister Enoch Godongwana expected, noting that the downward trend in South Africa’s Fitch rating may be reaching a tipping point.
The stable outlook follows a medium-term budget driven by mining windfall revenue and an upward revision to GDP that showed that debt is now forecast to peak at 78.1% of GDP, almost 10 percentage points down from what the government estimated in February, in fiscal year 2026. year. The consolidated budget deficit is also expected to narrow faster than expected.
“The government will continue to demonstrate its commitment to fiscal sustainability and enable long-term growth by reducing the budget deficit and sizeable debt,” the National Treasury said on Thursday.
The rand gained 0.3% against the dollar at 10:46 am local time on Thursday.
Still, Godongwana faces the difficult task of controlling debt, reducing budget deficits and accelerating growth-enhancing reforms in an economy stagnant in its longest downward cycle since World War II. Its proposed fiscal framework could be undermined by demands for greater social support measures, international travel bans imposed after the discovery of the omicron variant in the country, concessions on government wages, continued restrictions on the supply of electricity and political uncertainty.
South Africa’s debt assessments of the top three companies are at the lowest levels since the country first obtained credit ratings in 1994. Moody’s Investors Service rates it two steps below investment grade, while S&P Global Ratings places it at the same level as Fitch, but with a negative outlook.
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