Fitch Affirms South Africa at ‘BB-‘ with Stable Outlook
In its creditworthiness assessment, Fitch Ratings has affirmed South Africa’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook.
South Africa’s ‘BB-‘ credit rating is constrained by low real gross domestic product (GDP) growth, a high level of poverty and inequality, a high government debt/GDP ratio, and a rigid fiscal structure that hampers deficit reduction, according to the rating agency.
It added that the ratings are supported by a favourable debt structure with long maturities and mostly local-currency-denominated, strong institutions and a credible monetary policy framework.
“We forecast low real GDP growth of 0.9% in 2024, 1.5% in 2025 and 1.3% in 2026, against 0.7% in 2023”, Fitch said.
This compares with ‘BB’ median forecast of 3.2% in 2024, 3.6% in 2025 and 3.5% in 2026.
Fitch stated that South Africa growth is hampered by a struggling logistics sector, deeply entrenched structural factors, particularly high levels of inequality, poverty and unemployment, and weak investment.
The rating agency said it expects the weakness to persist, despite robust demographics, noting that electricity shortages, which dragged on growth in 2022 and 2023, are expected to ease, but sporadic incidents of load-shedding could still occur.
Fitch said the authorities have continued to implement the 35 priority reforms under operation Vulindlela, launched in 2020, which aim to modernise network industries, including electricity, water and transport.
In the rating note, analysts said they expect the government of national unity (GNU), in which the African National Congress (ANC) is the largest party, to continue the reform programme, which will contribute to a modestly increasing real GDP growth.
However, Fitch analysts said they do not think the reforms will significantly raise South Africa’s low growth potential, which we estimate at 1%.
The formation of the GNU following the May 2024 general elections lowers short-term policy uncertainty.
“We consider the ANC and DA broadly aligned on key priorities, particularly on the growth-enhancing agenda”.
Nevertheless, Fitch hinted that risks to political stability remain, with some topics, such as foreign policy, social grants and the national health insurance, potentially contentious. Risks are exacerbated by South Africa’s exceptional level of social inequality, according to the rating note.
On fiscal consolidation, analysts forecast a consolidated fiscal deficit of 4.7% in the fiscal year ending March 2025, broadly unchanged from 4.8% in 2023.
“We forecast this to be followed by fiscal deficits of 4.2% in fiscal year (FY) 25 and 4.0% in FY26, driven by a moderation of general public service and transfer expenditure”.
Fitch said South Africa fiscal flexibility is hampered by a rigid fiscal structure, with wages and interest payments representing 49% of total expenditure in FY24 in its forecasts.
“We expect revenue to remain at around 27% of GDP over the next three fiscal years. Risks to our forecasts are balanced, with wages and the national health insurance bill (if implemented) posing upside risks to our expenditure forecast, while stronger GDP growth could boost revenue”.
On South Africa government debt, Fitch analysts forecast consolidated government debt to continue to rise, to 76% of GDP in FY24, 77.8% in FY25 and 78.0% in FY26, well above the 2024 ‘BB’ median of 55%.
This is a slower pace than we anticipated in our January 2024 review, as the government plans to withdraw ZAR150 billion over FY24-FY26 from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), said Fitch Ratings.
Analysts stated that the GFECRA balance was ZAR507.3 billion in January 2024, stating that the temporarily reduced pace of debt accumulation does not affect our assessment that debt/GDP will not durably stabilise over the medium term.
The debt structure has long maturities of over 10 years for total debt and a low share of foreign-currency-denominated debt.
South Africa’s contingent liabilities remain high, with a government guarantee exposure to public institutions, independent power producers and public-private partnerships of ZAR629.6 billion in March 2024.
The rating note said the state-owned freight transport and logistics company, Transnet, remains hampered by rolling stock shortages, theft, vandalism and years of underinvestment and mismanagement.
Fitch explained that the 18-month recovery plan, announced in October 2023, enabled a small increase in railed and container volume.
However, its net loss has reached ZAR7.3 billion and its financial sustainability is constrained by high leverage. We believe further government support is likely and we have penciled in a ZAR50 billion below-the-line support in our debt projection, split between FY24 and FY25.
South Africa’s headline inflation eased to 4.6% in July 2024, close to the middle of the 4.5% +/- 1.5% target. “We expect further moderation as food and oil prices continue on their slowdown, and forecast inflation to drop to 4.5% by end-2024 and 4.0% in 2025 and 2026”.
In recent months, The South African Reserve Bank has expressed its desire to replace its inflation target by a point target of 3%. Fitch analysts said they believe there is still room for rate cuts under the revised target. Analysts said they expect a formal announcement and approval by early 2025.
On rising current account deficit: Fitch analysts forecast South Africa’s current account deficit to widen to 2.4% of GDP in 2024, from 1.6% in 2023, and stabilise at 2.6% in 2025 and 2026.
“We expect import growth to outpace export growth, with rising domestic demand fuelled by the relaxation of energy constraints and lower policy uncertainty.
“We anticipate an increase in net portfolio investments, which, combined with still-strong net foreign direct investment inflows, would stabilise SARB’s international reserves at 4.9 months of current external payments, against a ‘BB’ median of 4.5 months”.
Fitch said the fully flexible exchange-rate regime, the South African rand’s high liquidity in international markets, the strong domestic fund-management industry and high share of local currency in government debt help insulate the sovereign from external shocks. #Fitch Affirms South Africa at ‘BB-‘ with Stable Outlook
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