By David Mosaka
Sovereign Africa Ratings (SAR) has rated South Africa at BBB long term and B+ short term with a stable outlook (Average Investment Grade). The Outlook is regarded as stable for both the short and medium term. The BBB rating represents South Africa’s adequate repayment capacity in terms of its ability to meet its debt obligations.
Sovereign Africa Ratings
• The South African sovereign rating is underpinned by resilient macroeconomic and non-economic fundamentals.
• South Africa’s trade with major trading partners bounced back post Covid-19 lockdown disruptions. South Africa’s current account recorded a high surplus in March 2022 as compared to December 2021 attributable to improved export performance and higher commodity prices.
• The financial sector is stable with banks holding adequate capital and the liquidity is sufficient for external obligations.
• Tax revenue improved in 2021 and in the first two quarters of 2022.
• Natural resource endowments for South Africa remain a key asset for wealth generation, resource
rents and diversification of the economy.
• South Africa is facing headwinds in terms of rising interest rates, energy adequacy and prices as
well as increasing inflation prospects.
• The country’s fiscal position is relatively weak which is attributed to Covid-19-related spending in
2020 and 2021. Contingent liabilities, government guarantees to state-owned enterprises, possible public sector wage bill and discussions of the universal basic grant can upset the gains placed by government to manage and contain rising government debt.
• Environmental sustainability as captured by the just transition drive (decarbonisation) might affect key mining and manufacturing industries.
• We are rating South Africa at BBB long term and B+ short term with a stable outlook.
Outlook
The South African economy grew by an estimated 4.9% in 2021, driven by recovery in finance on the supply side and fixed investment on the demand side. Headline inflation picked up to 4.5% in 2021 from 3.3% in 2020, on the back of higher food and transport prices, and the policy rate was therefore increased to 3.75% in November 2021 from 3.5% in 2020. The budget deficit reached a record 10% of gross domestic product (GDP) in 2020 due to additional expenditure to mitigate the impact of Covid- 19. The fiscal deficit was estimated to have declined to 5.8% of GDP in 2021, reflecting higher revenue and rationalised expenditure. The current account surplus was estimated at 3.8% of GDP in 2021 from 2% in 2020, attributable to improved export performance and higher commodity prices.
External reserves increased from $54.5 billion in July 2021 to $58.4 billion in August 2021 (about 5 months of import cover) boosted by the special drawing rights (SDR) allocation. South Africa’s total public debt was estimated to have declined marginally to 70% of GDP in 2021 from 71% of GDP in 2020 given the fiscal consolidation. The financial sector is stable with banks holding adequate capital – 15.8% in March 2020 and 18.07% in January 2022, compared with 18.04% in December 2021 – well above the 10.5% minimum regulatory requirement. Poverty remains high, however, affecting 50% of the population, with the unemployment rate recorded at 35% in August 2022.
The economy is projected to grow by 1.9% and 1.4% in 2022 and 2023 respectively, lifted by growth in trade, tourism, mining, and manufacturing. Inflation is projected to rise to 5.8% in 2022 due to rising oil prices and likely increases in food prices resulting from the Russia–Ukraine conflict, but to decrease to 4.6% in 2023. The fiscal deficit is also projected to increase to 6.2% of GDP in 2022 before falling to 5.1% of GDP in 2023 due to the consolidation measures, including higher tax revenues and an educed wage bill. The current account deficit is projected to be 1.4% of GDP in 2022 and to swing to a surplus of 0.1% in 2023 due to the recovery in export demand and expected fall in commodity prices.
According to the National Treasury (2022), government expects to achieve a primary surplus where revenue exceeds non-interest expenditure by 2023/24. In 2024/25, main budget non-interest expenditure will grow slightly above CPI inflation. The consolidated budget deficit is projected to narrow from 6% of GDP in 2022/23 to 4.2% of GDP in 2024/25. Gross loan debt will stabilise at 75.1% of GDP in 2024/25. Debt-service costs consume an increasing share of GDP and revenue and are expected to average R333.4 billion a year over the medium term.
Total consolidated government spending will amount to R6.62 trillion over the next three years, and the social wage will take up 59.4% of total non-interest spending over this period. Additional allocations of R110.8 billion in 2022/23, R60 billion in 2023/24 and R56.6 billion in 2024/25 are made for several priorities that could not be funded through reprioritisation. These include the special Covid-19 social relief of distress grant, the continuation of bursaries for students benefiting from the National Student Financial Aid Scheme, and the presidential employment initiative. The bulk of the spending is allocated to learning and culture (R1.3 trillion), social development (R1 trillion) and debt service costs (R1 trillion) over the Medium-Term Expenditure Framework (MTEF).
Over the next three years, consolidated Government spending is expected to grow at an annual average of 3.2%, from R2.08 trillion in 2021/22 to R2.28 trillion in 2024/25. As public debt stabilises, Government will progressively reduce debt and the burden it places on the economy.
Given the revenue improvement, Government proposes R5.2 billion in tax relief to help support the economic recovery, provide some respite from fuel tax increases and boost incentives for youth employment. Most of the relief is provided through an adjustment in personal income tax brackets and rebates. In addition, there will be no increase in either the general fuel levy or the Road Accident Fund levy. Progress continues to be made in rebuilding the South African Revenue Service.
The fiscal outlook is subject to significant risks. Elevated risks to the fiscal outlook include:
• A global and domestic economic slowdown, resulting in lower revenue and greater calls for fiscal support.
• Rising borrowing costs due to inflation and higher global interest rates.
• The materialisation of contingent liabilities from state‐owned companies.
• Higher‐than‐budgeted compensation increases.
Macroeconomic Performance
After two consecutive quarters of positive growth, real gross domestic product (GDP) decreased by 0,7% in the second quarter of 2022 (Q2: 2022). The devastating floods in KwaZulu-Natal and load shedding contributed to the decline, weakening an already fragile national economy that had just recovered to pre-pandemic levels. The South African economy has also been dealt a series of harmful blows, including:
• The devastating floods in parts of KwaZulu-Natal, which damaged critical infrastructure and business operations, affecting external trade in the process.
• Very frequent load shedding over prolonged time periods, which has been highly detrimental to the South African economy and society.
• Strike actions in a number of critical sectors, including energy, transportation, and mining.
• Fast-rising prices at the producer and consumer levels, primarily but not exclusively driven by imported inflation, which are affecting the spending capacity and propensity of households and business enterprises.
• More aggressive interest rate hikes as the South African Reserve Bank’s (SARB) Monetary
Policy Committee seeks to anchor inflation expectations. Consideration for strategies to deal with cost-push inflation may be considered by the Government as SAR views interest hikes to be more suitable for demand-pull inflation.
• Stubbornly high unemployment rates and the low probability of meaningful job creation materialising in the short term.
• Falling business and consumer confidence, as already captured in the respective indices for the second quarter of 2022, with adverse repercussions on spending, production, and investment activity.
• Increased uncertainty over the economy’s short-term prospects, with weaker rates of growth now anticipated and a technical recession in 2022 becoming a reasonable possibility.
SAR’s ratings take into account South Africa’s performance in terms of both macroeconomic and non- economic fundamentals. The ratings take into account the direction and assessment of the South African economy in terms of key indicators and variables such natural resource endowments, climate change risks, social and socio-economic fundamentals, economic growth, government debt (domestic and foreign currency denominated), gross loan debt and contingent liability profile, budgetary performance and adequacy of fiscal flexibility, external performance, monetary and fiscal policy stance, liquidity position and institutional and governance framework.
The ratings are also supported by the country’s reconstruction and recovery plan which aims to address some of the country’s challenges such as high unemployment, poverty and income inequality, energy, and water crises, as well as deteriorating infrastructure and logistics networks. In terms of the government’s plans, the following priority interventions will be made:
• Aggressive infrastructure investment.
• Employment-orientated strategic localization, reindustrialisation, and export promotion.
• Energy security.
• Support for tourism recovery and growth.
• Green economy interventions.
• Mass public employment interventions.
• Strengthening food security; and
• Macroeconomic interventions.
Integrity of the Rating Process
• SAR employees comply with all applicable laws and regulations governing their activities in the jurisdictions in which they operate, without exception.
• SAR and its employees will, at all times, deal fairly and honestly with issuers, rated entities, investors, market participants, and the public.
• SAR will hold its employees to high standards of integrity at all times. Methodology Reviews
SAR endeavours to continuously improve its methodologies, therefore SAR will regularly review its methodologies and publish them for public comments. Such changes can include the addition or removal of indicators, editorial changes, model calculations, variable weights, and the mapping of risk scores to the final risk categories.
SAR also consults external experts to review its models and comments are considered. SAR will reflect any changes in future versions of its methodologies which are made available on www.saratings.com.
Glossary of Terms
| Agent | Anyone representing a Rated Entity or a Rated Entity agent, whether anindividual or a group. |
| CRA | Credit Rating Agency |
| Credit Rating | A Credit Rating is an opinion made by a CRA based on a predetermined ranking system of rating categories regarding the creditworthiness of an entity, a debt or financial obligation, debt security, preferred share, or other financial instrument, or of the issuer of such a debt or financial obligation, debt security, preferred share, or other financial instrument. |
| Credit Rating Action | Any of the following is a credit rating action:1. the process through which a credit rating is given to a rated entity or obligation, including credit ratings given during a subsequent rating process.2. When relevant conditions are thought to have been satisfied in the anticipated ratings process, a provisional note is removed from a credit rating.3. a change to a credit rating (i.e., upgrade or downgrade).4. placing a credit rating under review, reconfiguring an active review, or removing a credit rating from review (i.e., Credit Rating Confirmation).5. the assignment of, or modification of, an Outlook linked to a Rated Entity or several Credit Ratings.6. a Credit Rating Affirmation.7. a Credit Rating Withdrawal. |
| Currentaccountbalance | Exports of goods and services minus imports of the same plus netfactor income plus official and private net transfers. |
| Employee(s) | An Employee is any full-time or part-time employee of SAR or any of itssubsidiaries and associated companies. |
| ForeignDirectInvestment (FDI) | Direct investment conducted by non-residents. |
| Grossdomesticproduct (GDP) | Total market value of goods and services produced by residentfactors of production. |
| GDP per capita | GDP divided by population. |
| Issuer | Issuer is any entity that issues debt, a credit commitment, debt-likeobligations, or securities. Examples of such entities include special purposevehicles, companies, governments, and local governments. |
| Lead Rating Analyst (Lead Analyst) | Lead Rating Analyst is a term used to describe an analyst who is primarily responsible for providing details about a credit rating and/or for communicating with the issuer(s) regarding a specific credit rating or regarding the credit rating of a financial instrument issued by that issuer, as well as, when appropriate, for creating recommendations for the ratingcommittee in relation to that credit rating. |
| Manager(s) | Manager(s) are employees who oversee managing personnel. |
| Netgeneralgovernment debt | General government debt minus general government liquidfinancial assets. |
| Netexternalliabilities | Total public- and private-sector liabilities to non-residents minus totalexternal assets. |
| Outlook | An Outlook is an opinion regarding the likely path of an issuer’s rating couldtake over the medium term. |
| Prohibited Recommendation | Any proposals or recommendations made either formally or informally, regarding the design of financial instruments on which a CRA is envisioned to issue a Credit Rating may be made by an employee to a Rated Entity or its Agent to improve the Rated Entity’s rating. This includes suggestions about the Rated Entity’s corporate or legal structure, assets, liabilities, oractivities. |
| Rated Entity (ies) | A Rated Entity is any entity rated by a Credit Rating Agency (CRA) |
| Review | A review is an indication that a rating may be changing in the not-too-distant future. |
| SAR | Sovereign Africa Rating (Pty) Ltd is authorised to conduct business as a credit rating agency as per the Credit Ratings Services Act of 2012 of theRepublic of South Africa. |
| SpecialDrawing Rights(SDR) | The SDR is an international reserve asset, created by the International Monetary Fund in 1969 to supplement its member countries’ officialreserves. |
| Security | Security refers to any type of financial instrument, including stocks, bonds, debentures, notes, options, equity securities, convertible securities,warrants, derivative securities (Derivative), and warrants. |
| Subsequent Ratings Process | Ratings after that Process is the process of determining the Credit Ratings to be assigned (together with the related outlook or review status, if applicable) solely based on the Credit Ratings of a programme, seriescategory/class of debt, or principal Rated Entity that already exist. |
Please see the full South Africa sovereign rating report on: www.saratings.com
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For more information, contact:
Committee Chair: David Mosaka | Chief Ratings Officer | david@saratings.com | Lead Analyst: Bekithemba Ndimande | Rating Analyst | bekithemba@saratings.com | Support Analyst(s): Lomanja Malaba | Rating Analyst | lomanja@saratings.com |
Tel: +27 11 327 2020