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Both S&P Global Ratings and Fitch decided not to cut their rating of South Africa deeper into “junk” on Friday, with the latter noting that South Africa’s state finances have “improved substantially”, despite continued “substantial risks to debt stabilisation”.
In November last year, Fitch expected that government’s budget deficit would come in at 15.5 percent for last year – instead it only reached 11.1 percent.
This was thanks to stronger-than-expected tax income and a freeze in public sector wage hikes.
Containing these wages remains key to government’s fiscal consolidation plan, but Fitch does not expect that its current proposal to freeze wages will be implemented.
“Unions are unlikely to accept that and we assume a wage increase in line with inflation. A higher increase is possible given the trade unions demand a rise by inflation plus 4 percent.”
But Fitch also notes that South Africa’s “external finances have weathered the pandemic well”, with strong commodity prices helping the country to achieve a current-account surplus of 2.2 percent of GDP, the first surplus since 2002. It expects another current account surplus this year.
In addition, it says that foreign investors have returned to the local bond market after large outflows at the start of the pandemic. “Given South Africa’s favourable debt structure, with a low share of foreign-currency debt and long-maturities, financing challenges are contained.”
But it adds that “exceptionally high inequality” could lead to long-term challenges, and add pressure to government’s attempts to cut spending as there are “rising calls for improving public services”.
“In-fighting within the ANC, highlighted by the recent suspension of the party’s secretary general (Ace Magashule), also continues to slow down government decision-making.”
Fitch kept its rating for South Africa at “BB-” with a negative outlook.
For its part, S&P kept South Africa’s long term foreign and local currency debt ratings unchanged at “BB-” and “BB”, respectively, with a stable outlook.
It also highlighted the boost of higher commodity prices, but said that structural constraints, a weak pace of economic reforms, and slow vaccination rates will continue to constrain medium-term economic growth and limit the government’s ability to contain the debt-to-GDP ratio.
In response, government said in a statement that it plans to accelerate its vaccination rollout programme, with the aim of inoculating five million citizens aged over 60 by the end of June 2021. – news24.com
Online Reporter