Fitch Affirms South Africa at 'BB-' with Stable Outlook
Cyril Ramaphosa, S.A President

Fitch Ratings has affirmed South Africa’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a Stable Outlook. In its latest publication, the global rating agency said South Africa’s ‘BB-‘ IDR is constrained by low real GDP growth, a high level of inequality, a high and rising government debt-to-GDP ratio, and a modest path of fiscal consolidation.

According to Fitch, the country’s growth is hampered by power shortages that are expected to continue in the near to medium term, although at a lower magnitude than in recent months, and by a struggling logistic sector.

The ratings are supported by a favourable debt structure with long maturities and mostly local-currency-denominated, strong institutions, as well as a credible monetary policy framework.

“We forecast real GDP growth will accelerate to 0.9% in 2024 and 1.3% in 2025, from an estimated 0.5% in 2023”, Fitch rating note reads.

The economy remains severely troubled by the impact of electricity capacity constraints, a struggling logistics sector and a high level of inequality.  Further incremental progress on the 35 priority reforms identified by the government under Operation Vulindlela, launched in 2020, was recorded in the second half of 2023, mainly in the energy and logistics sectors.

“Although the reforms will contribute to a modest increase in real GDP growth in the near to medium term, they are limited in ambition and we do not think they will significantly enhance South Africa’s low growth potential, which we estimate at 1.2%”, the rating note added.

Fitch estimates that load-shedding will reduce in intensity in 2024 and 2025 compared with 2023, but not disappear. The peak of load shedding declined from 6.7 GW in May 2023 to 3.5 GW in December 2023.

The return to the grid of three units of Kusile power station since September 2023, and the synchronisation of unit 5 in December 2023 add a total 3.2 GW to generation capacity. Further capacity is expected to come from private-sector investments, with a pipeline of confirmed projects representing 12GW of new capacity.

It noted that the legal separation of Eskom into three divisions, intended to further catalyse investment in generation and transmission, is moving slowly, and we do not expect full separation before 2025.

In the note, Fitch explained that Financial, operational and governance weaknesses at Transnet, the logistics SOE, disrupted supply chains in 2023, with significant delays at ports and decreased rail freight volumes.

“To address its immediate liquidity constraints and support its recovery plan, the government granted a ZAR47 billion (0.7% of GDP) guarantee facility in December 2023”.

Transnet plans to announce a five-year strategic plan by March 2024, and Fitch analysts said they assess that fiscal support, through either capital injections or debt transfer, is likely given the importance of Transnet in the South African economy.

“We have assumed ZAR50 billion below-the-line support in our debt projections, split between the fiscal year ending in March 2025 and FY25. The opening of Transnet’s infrastructure to third-party freight operators in 2Q24 would help improve the performance of the logistics sector”.

Fitch Ratings forecast a widening of the consolidated fiscal deficit to 4.7% of GDP in FY23, from 3.7% in FY22. It said this will be driven by an erosion of revenue collection hampered by low real GDP growth and low corporate profitability, upward expenditure pressure stemming from the public-service agreement that was signed after the budget was released and interest payments with the interest-to-revenue ratio gradually increasing to 20.9% in FY25, from 16.7% in FY22.

The consolidated budget deficit will remain substantial at 4.8% of GDP in FY24 and 4.6% in FY25, reflecting further payroll increases and high social spending partially offset by higher revenue growth.

Fiscal flexibility will reduce with a growing share of expenditure going to the wage bill and interest payments, from 46% in FY21 to an estimated 49% in FY25, according to the rating note.

Fitch explained that the continuation of social spending beyond the end of the social relief of distress programme, which was due to expire in March 2024, was confirmed in November 2023. This is in line with Fitch’s previous assumptions.

“We expect general government debt to reach 83.2% of GDP in FY25, from an estimated 76% in FY23, well above the anticipated 2023 ‘BB median’ of 52.2% ‘BB’. Nigeria Eurobond Slumps after CBN Resumes OMO Auction

“Government debt will increase due to a primary surplus below its debt-stabilising level, weak growth and large stock-flow adjustments driven by the revaluation of inflation-linked bonds, foreign-currency denominated debt, discount on loan transactions, debt transfers from Eskom and the assumed debt transfer from Transnet”.

Total Transnet debt amounts to ZAR130 billion and Fitch said to contain debt accumulation, the government plans to present a new fiscal anchor in the FY24 fiscal bill to be presented in February 2024.

Analysts estimate CPI inflation declined to 5.5% at end-2023, down from 7.2% at end-2022.  Inflationary pressure stemming from a weak rand, the cost of load-shedding for businesses, and from supply chain disruptions, will be cushioned by South Africa Reserve Bank (SARB)’s hawkish, higher-for-longer stance, enabling CPI inflation to decrease to 5% at end-2024, within SARB’s 4.5% (+-1.5%) target band.

“We believe the SARB has completed its tightening cycle and leave the policy rate at 8.25% until 1Q24”.

Also, Fitch ratings estimated the current-account deficit widened to 2% of GDP in 2023, from 0.4% in 2022, amid a marked decline in export receipts due to lower volumes constrained by logistics sector difficulties and a deterioration in South Africa’s terms of trade.

“We anticipate the current account deficit to widen to 2.9% of GDP in 2024 and stabilise at 3% in 2025, fuelled by rising imports driven by a recovery in investment”.

However, the fully flexible exchange-rate regime, the rand’s high liquidity in international markets, the strong domestic fund-management industry and high share of local currency in government debt should help insulate the sovereign from external shocks.

South Africa’s unemployment moderately declined to 32.2% in 3Q23, from a record high of 35.4% in 4Q21, but remains much higher than pre-pandemic. The high unemployment rate, in conjunction with an exceptionally high level of income inequality will continue to constrain fiscal consolidation and pose a risk to socio-political stability, with frequent strikes and protests.

The African National Congress’s dominance over the political landscape has been challenged since the party’s poor performance in the November 2021 municipal elections. Fitch analysts believe the party could lose its majority in the May 2024 general election, but this would be unlikely to result in major changes in economic policy. #Fitch Affirms South Africa at ‘BB-‘ with Stable Outlook