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Moody’s upgrades SA’s credit outlook on stable debt burden scenario

Moody’s upgrades SA’s credit outlook on stable debt burden scenario
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The commodities cycle as well as steps to reduce spending have raised the prospect that Treasury can stabilise its debt burden, leading to ratings agency Moody’s upgrading South Africa’s credit outlook to stable from negative. Although the rating remains deeply in ‘junk’ status territory with Moody’s flagging ‘social concerns’, the descent into the garbage heap has been arrested.

South Africa’s Ba2 rating has been reaffirmed, ratings agency Moody’s Investors Service said in a statement late on Friday, 1 April. Although the country remains a couple of notches below coveted investment grade status, its outlook has been changed from negative to stable.

This in effect means that South African debt still carries significant risk but its ability to repay its creditors is not seen worsening at this stage. That’s good news that could, among other things, offer some support to the rand and South Africa’s bond market. But it is not the kind of announcement that would see you crack open a nice bottle of bubbly. Any glasses raised to this development will contain plonk from a box.

“The key driver behind the decision to change the outlook to stable is the improved fiscal outlook that raises the likelihood of the government’s debt burden stabilising over the medium term. While risks related to weak state-owned enterprises (SOEs) and social demands remain, they are consistent with a Ba2 rating,” Moody’s said.

“Indeed, over the last two fiscal years, the government has shown it was able to reprioritise its spending while staying committed to fiscal consolidation, which Moody’s expects will remain the case going forwards.”

Sizzling commodity prices, which have retained their glow because of Russia’s invasion of Ukraine, have played a starring role on this stage. The drawing of a line in the sand when it comes to the public sector wage bill is also in the spotlight. 

“High commodity prices have boosted profitability of companies in the mining sector, which contributed to a 58% increase in corporate income tax in fiscal 2021 (FY2021, ending 31 March 2022), or 2% of GDP higher than planned in the initial budget. At the same time, for the first time in many years, the government limited the growth of its wage bill to 1.6%, well below inflation,” Moody’s said. 

“These were the two key factors behind the reduction in the government’s primary deficit to 1.3% of GDP in FY2021 from 5.7% in FY2020 and narrower than Moody’s previous forecast of 3.4%.”

The upshot is that Moody’s now sees South Africa’s debt-to-GDP ratio stabilising at around 80%, including guarantees to SOEs, over the medium term. 

“This marks an improvement compared to Moody’s previous projections of a long period of ever-rising debt-to-GDP,” Moody’s noted. 

After the carnage of the “lost Zuma decade” of slow economic growth, soaring debt and rampant looting as well as the economic calamity triggered by the Covid-19 pandemic and the government’s often ham-fisted, corrupt and agenda-driven response to it — recall the booze and tobacco sales bans and the Digital Vibes scandal — this, at least, suggests that the fiscal ship is no longer heading straight into an iceberg. 

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ESG red flag

But this hardly means it will be smooth sailing ahead in an economy with an unemployment rate that is more than 35% and in a country that remains the most unequal on Earth. 

One area of concern flagged by Moody’s is environmental, social and governance considerations (ESGs). These have soared to the top of the agenda in the corporate and private sectors in recent years, but are also applied to wider economies and states. 

South Africa remains a major risk on this front. 

“South Africa’s ESG Credit Impact Score is highly negative (CIS-4), reflecting high exposure to social risks and moderately negative exposure to environment risks, combined with relatively low resilience as the weak public finances and relatively low-income levels constrain its capacity to respond to environmental and social shocks,” Moody’s said.

“Exposure to social risks is highly negative, with a very high exposure to risks related to labour and income and high exposure to risks in health and safety. South Africa has one of the highest levels of income inequality, very high unemployment especially amongst the youth.”

A major constraint to South Africa’s credit rating is social unrest, a point underscored by the July riots of 2021 which President Cyril Ramaphosa said last week wiped R50-billion from the economy and left two million people jobless.  

The road back to an investment grade rating is going to be long, and one that is riddled with protests, riots, strikes and gaping potholes. DM/BM


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