Ratings’ agency S&P Global is expected to release its sovereign rating review of South Africa after markets close on Friday.
Economic and market observers largely predict that the rating agency will keep the country’s credit rating unchanged.
In May, S&P assigned a positive outlook to its BB local currency and BB-hard currency ratings on the country. It’s not confirmed but Moody’s may also make its ratings call tonight as well.
In a stroke of luck for market sentiment, S&P Global shifted South Africa’s credit outlook to “positive” from “stable” in May this year.
They cited favourable terms of trade for the country on the back of the mining boom, as well as a perceived improvement in the country’s fiscal direction, and noted some level of implementation of key structural reforms through government’s Operation Vulindlela.
Assigning a positive outlook in May means that there is a one-third chance that they may raise the country’s rating.
Senior economist at Standard Bank, Elna Moolman says, “Our view is that it would make sense for them to wait a little bit longer to just wait until after the budget. Typically they try to resolve these positive or negative outlooks within a 12-month time frame. If I was in their shoes, I would have waited until after the budget just so that we have more certainty about some of the key risks for example, how much of Eskom’s debt government is going to take on, what the format is going to be and, of course, since that upgrade in the outlook on our rating, the global story has deteriorated quite significantly.”
Market watchers believe that Finance Minister Enoch Godongwana’s mid-term budget statement delivered in October went a long way in displaying the kind of fiscal discipline that markets and ratings agencies expect and suggest this could pave the way for a better credit rating outcome.
Finance Minister Enoch Godongwana’s 2022 Medium-Term Budget Policy Statement:
Chief Investment Officer at Makwe Fund Managers, Makwe Masilela says: “Markets are expecting to see an improved outlook coming from the rating agencies because if you check our mid-term budget. We have seen that; number one, the government tried, by all means, to make sense that the deficit doesn’t get out of control and also tried to make sure that when it comes to the public wage bill, it gets to be controlled and also to other structural reforms and just like making sure that energy supply gets to be reliable. They are trying with these new loans and also them refusing to continue to bail out state-owned enterprises.”
But the risks for the fiscus remain on the upside. Just looking at the public service workers, for example; many are still pushing for an above-inflation wage increase for the 2022/2023 fiscal year, with strike action a constant threat, which would disrupt government services.
If they sufficiently bring pressure to bear, this could upset the fiscal metrics.
And the high commodity prices that South Africa has benefited from in recent years may slow down substantially in light of an impending global recession.
A more positive credit rating for South Africa would mean the country’s financial markets will look more attractive for investment and would help to improve the country’s cost of borrowing.
All will be revealed later this evening when two of the major ratings’ agencies are expected to make their call.
