South Africa stands on the cusp of a ratings upgrade should the Government of National Unity (GNU) deliver on higher gross domestic product (GDP) growth, said the Bank of America (BofA) on Tuesday.
The country is currently rated below the investment grade with a stable outlook by all three major ratings agencies as a result of deteriorating fiscal metrics, particularly the escalating debt levels, social spending and burgeoning public sector wage bill, leaving the country’s borrowing costs heightened due to the risk level.
According to the BofA Securities analyst Tatonga Rusike, firming up business confidence, positive sentiment in policy reforms under the GNU and limited power cuts are pointing in the way of a “potential improving economic outlook” framework.
“Ratings upgrades are likely to follow should SA deliver on higher GDP growth and debt to GDP declining over the next 3 years,” he said.
However, the BofA Securities is opting to be “cautious on near term ratings upgrades given fiscal slippages” under last week’s mid-term budget policy statement.
“Will wait on delivery,” explained Rusike.
South Africa’s economic outlook has nonetheless looked to be improving amid low inflation and a rate-cutting cycle that is expected to “buoy investment and consumption” across the economy.
The International Monetary Fund has revised upwards South Africa’s growth forecast for 2024, from 0.9% previously to 1.1% while the National Treasury also made the same forecast last week though it was a downward revision from 1.3%.
“Financial markets have rallied. Derived ratings from market implied credit spreads suggest South Africa is trading as a BB, which is aligned with Moody’s (Ba2/stable) but lower than Fitch (BB-/stable) and S&P (BB-/stable),” noted Rusike.
Although last week’s Medium-Term Budget Policy Statement may have forced some economists and analysts to be cautious about South Africa’s short-term outlook, the BofA Securities believes that “if the 2025 budget stays within the current framework fiscal stance of primary surpluses and debt stabilisation near term” then a “positive outlook next year” can be expected.
“A first rating upgrade would be based on delivering rather than anticipating strong GDP growth, close to 2% in headline or positive per capita growth. A second notch upgrade would ensue, with debt stabilisation and primary surpluses over 1% post 2026,” said the economics research firm.
South Africa lost its Fitch and S&P investment grade status in 2017 before Moody’s weighed-in in 2020. Various factors contributed to this, including governance weaknesses, lack of reforms leading to negative per capita growth performance and weakening public finances.
South Africa slipped further into below investment grade in 2020, with foreign currency ratings reaching a bottom of BB- under Fitch and S&P, as well as a Ba2 grading by Moody’s in the same year.
However, South Africa has been spared further downgrades over the past four years and now current fundamentals are pointing to an uptick in confidence. This now requires to translate to tangible growth and analysts point out that more still needs to be done to unlock gridlocks such as transport and logistics that are holding back economic growth prospects.
“To return to investment grade would be a difficult task in the near term. However, rating upgrades may start next year,” said Rusike.
“Our best-case scenario would be two notch upgrades at Fitch and S&P and one notch at Moody’s within 3-4 years, taking us to the 2029 election.”
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