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S&P Global downgrades SA’s ratings outlook as power crisis dims growth prospects

S&P Global downgrades SA’s ratings outlook as power crisis dims growth prospects
(Photo: Unsplash / S&P logo)

Ratings agency S&P Global downgraded South Africa’s outlook late Wednesday to ‘stable’ from ‘positive’, essentially because of the scale of the power crisis. This means another rung has been added to the ladder South Africa needs to climb to get its credit rating out of ‘junk’ status.

The economic toll from the surge in rolling blackouts is mounting, and S&P’s verdict this week was just the latest indication of the damage being wrought. 

On the bright side, S&P affirmed South Africa’s “BB-/B” foreign currency sovereign credit ratings, which is a long way from a coveted investment grade rating. But by downgrading its outlook to “stable” from “positive”, it signalled that a lot more work now needs to be done for South Africa to qualify for an upgrade.

Indeed, it warned that it could lower the rating deeper into “junk status” – a red flag to lenders as it means a deterioration in a country’s creditworthiness – if the power crisis deepens or economic reforms do not gain traction. 

“We could lower the ratings if the ongoing implementation of economic and governance reforms does not progress as planned, resulting in further deterioration in economic growth, or higher-than-expected fiscal financing needs. This could, for example, result from a deepening of the electricity crisis or if critical infrastructure constraints worsen,” S&P said. 

That also speaks to the woes of Transnet and the road and water networks, among others, which are also shredding the economy. 

“Despite the government’s attempts at reforming the power sector, acute electricity shortages pose downside risk to both short- and medium-term growth prospects,” the ratings agency said. 

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S&P cited the shock 1.3% gross domestic product (GDP) contraction on a quarterly basis in the fourth quarter of 2022, which defied economists’ expectations of a 0.4% decline, and which was mostly a consequence of the surge in rolling blackouts. 

S&P revised its real GDP growth forecast for South Africa for 2023 to 1.0% from 1.5% previously. Frankly, growth of 1.0% looks optimistic, and in the current climate, don’t expect it to be revised anything but lower. 

The economy this quarter is most likely contracting, meaning that it has fallen into a recession that will be hard to shake if power outages remain at current levels or get worse in the winter. 

“Downside risks to this forecast remain prominent, since South Africa has been unable to fully capitalise on the global upswing in commodity prices, while continued electricity shortages signal a potentially difficult winter ahead,” S&P pointedly noted. 

On the recent greylisting by the Financial Action Task Force, it said this “could weigh on government borrowing costs and raise financial transaction and compliance costs for the economy and trade flows”.

“However, it’s unlikely to significantly affect South Africa’s creditworthiness since the government retains access to deep domestic capital markets.” 

Well, at least there’s that. 

The bottom line is that this is yet another indicator of an economy that has little going for it at the moment. And until the lights are consistently kept on, there are almost no prospects for material improvement. 

The only thing that is going up is the cost of state failure under the ANC. DM/BM


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