Since 2017, South Africa has been classified as a country with high-risk bonds by rating agencies such as S&P Global Ratings, Fitch Ratings and Moody’s. As a result, the country’s credit rating has been downgraded to “junk” or “non-investment grade” status. A status which has made investment in South African public debt risky. There are many reasons for this downgrade. They include high public indebtedness, weak economic growth, political instability and persistent social problems (poverty, inequality and unemployment). While these challenges remain, reforms and increased financial discipline have enabled the country to begin to turn things around. Recently, South Africa has been considered an investment grade country, offering a lower risk of default. A position that is attracting more investors.
Encouraging but fragile progress
The country still has a major budget deficit, although analysts at Goldman Sachs remain optimistic. They believe the country is on a credible path to stabilizing its debt and reducing its debt-to-GDP ratio to below 70% by the end of the decade. Bloomberg even reports that South Africa could see its credit rating upgraded within six months if current trends continue. Finance Minister Enoch Godongwana recently presented the Medium-Term Budget Policy Statement (Mtbps), which paints a cautious picture of South Africa’s public finances.This presentation reveals a slightly higher-than-expected budget deficit. This deficit is partly due to a reduction in tax revenues of $1.19 billion (R22 billion), well above the $652 million (R12 billion) initially anticipated.
The Bank of America report points out that this deficit, although contained, is a reminder of the rating agencies’ concerns about the country’s economic underperformance and the structural weakness of its public finances. Fiscal slippage, defined as public spending in excess of initial forecasts, remains a major obstacle to a potential credit rating upgrade. Tatonga Rusike, Bank of America’s economist for sub-Saharan Africa, warns that this slippage, although minor, could undermine the government’s efforts to achieve sustained growth and stabilize debt. Indeed, the latter is forecasting an increase in spending over the medium term, from $130 million (R2.4 trillion) in 2024/2025 to $152 million (R2.8 trillion) in 2027/2028.
An improved outlook, but persistent challenges
Despite these obstacles, the outlook remains encouraging. The government’s confidence in structural reforms, controlled inflation and the expected fall in interest rates are all factors likely to stimulate investment and consumption in South Africa. According to the Bank of America report, implied market credit spreads suggest that South Africa is trading at a “BB” rating level. This means that the company has exposed itself to the risk of default, in line with Moody’s rating (Ba2/stable).
It positions the company with an average value quality, a moderate level of credit risk, likely to include certain speculative characteristics and slightly below Fitch and S&P (BB-/stable). However, to ensure a sustainable rating upgrade, the government will need to demonstrate greater fiscal rigor in the upcoming 2025 budget. It will have to be cautious in the face of potential risks associated with wage increases, subsidies for disadvantaged groups and support for state-owned companies such as Transnet.
Although the country appears to be on the right track to regaining investment-grade status, caution is called for. Recent budgetary slippages show how difficult it is for the country to maintain rigorous financial management in a difficult economic climate. If South Africa manages to stay on course without major budgetary deviations, it could finally hope to emerge from junk status and strengthen its position on international financial markets.
