Johannesburg – South Africa could improve its ratings and move back into investment grade territory if there was sustained economic growth and fiscal outcomes, according to Standard and Poor’s Global Ratings.
The ratings agency on Friday with government’s rand debt at “BB+”, the first notch of sub investment grade, and SA’s foreign-currency debt unchanged at “BB”, the second grade of junk status, with a stable outlook.
The first step towards moving out of sub-investment grade (junk status) would be to receive a positive outlook when the ratings agency reviews the country again in November.
“Ratings upside could also arise if the risks of a deterioration in external funding sources were to subside, and external imbalances declined,” S&P said.
Despite projecting an average 2% economic growth between 2018-2021, S&P is concerned about low per-capital growth of 1%, slower than other emerging markets.
The country’s rating could also improve if structural reforms were introduced to create employment and improve competitiveness.
S&P warned it could change its outlook to negative or put SA further into sub-investment grade if it observed fiscal deterioration through increased spending and weaker economic growth.
The ratings agency flagged a possible higher than expected public sector wage agreement and unbudgeted bailouts to state owned enterprises (SOE’s), as its spending concerns.
While S&P said it expects land reform to be undertaken through the rule of law, it warned that if property rights or the enforcement of contracts were to weaken, this would lower SA’s credit rating
More work to be done
The CEO Initiative on Saturday welcomed S&P’s decision to leave SA’s credit rating unchanged and not to place the country further into sub-investment grade, “which would make borrowing even more expensive than it is”.
“We believe we are starting to see 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,” said Jabu Mabuza, co-convenor of the CEO Initiative.
The business lobby group highlighted several changes since S&P downgraded the country in November, including the cabinet reshuffle, new boards appointed at key SOE’s, the establishment of the State Capture Inquiry and the appointment of four investment envoys by President Cyril Ramaphosa.
“These and other signs of progress are indeed positive, but much more work needs to be done if South Africa is to regain its investment grade ratings from Fitch and S&P and retain local and foreign capital as a vital ingredient for economic growth and job creation, amid a global environment where investors are increasingly discerning in their search for quality yield,” the CEO Initiative’s statement read.
Moody’s kept SA’s government debt at investment grade in March, changing its outlook from negative to stable.
Fitch, the other of the three major ratings agencies to still consider SA as sub-investment grade, has not released its review yet and typically doesn’t announce them ahead of time.
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