Fitch Ratings has reaffirmed South Africa's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-', maintaining a stable outlook.
This decision reflects a balance of South Africa's economic challenges and the country's favourable debt structure and strong institutions.
Key Rating Drivers
Credit Fundamentals: South Africa's 'BB-' IDR is constrained by several factors, including low real GDP growth, high levels of poverty and inequality, and a high government debt-to-GDP ratio.
The country also faces a rigid fiscal structure that complicates efforts to reduce the budget deficit, it said.
However, the rating is supported by South Africa's favourable debt structure, characterized by long maturities and mostly local-currency-denominated debt. Additionally, strong institutions and a credible monetary policy framework provide some stability.
Weak GDP Growth: Fitch projects South Africa's real GDP growth to remain low, with forecasts of 0.9% in 2024, 1.5% in 2025, and 1.3% in 2026.
This is significantly below the median growth forecast for countries with a 'BB' rating.
Persistent challenges such as a struggling logistics sector, high levels of inequality, poverty, unemployment, and weak investment continue to hinder economic growth. Although electricity shortages are expected to ease, sporadic load-shedding remains a risk.
Progress on Reforms: The South African government has continued to implement the 35 priority reforms under Operation Vulindlela, launched in 2020, to modernize network industries, including electricity, water, and transport.
These reforms are expected to contribute to modest GDP growth, though Fitch does not anticipate a significant increase in South Africa's growth potential, which remains estimated at 1%.
Political Uncertainty: The formation of a Government of National Unity (GNU) following the May 2024 general elections has reduced short-term policy uncertainty. The African National Congress (ANC) and Democratic Alliance (DA) are broadly aligned on key priorities, particularly regarding growth-enhancing policies.
However, risks to political stability persist due to the high levels of social inequality and potential disagreements on contentious issues like foreign policy, social grants, and national health insurance.
Moderate Fiscal Consolidation: Fitch forecasts a consolidated fiscal deficit of 4.7% for the fiscal year ending March 2025, slightly lower than the previous year's 4.8%. The deficit is expected to gradually decrease to 4.2% in 2026.
The government's fiscal flexibility remains limited due to a rigid fiscal structure, with wages and interest payments comprising a significant portion of total expenditure.
High Government Debt: South Africa's government debt is projected to rise to 76% of GDP in FY24, 77.8% in FY25, and 78.0% in FY26, far above the 'BB' median of 55%.
Although the pace of debt accumulation is slower than anticipated, Fitch remains concerned that the debt-to-GDP ratio will not stabilise over the medium term.
Favourable Debt Structure: South Africa benefits from a debt structure with long maturities and a low share of foreign-currency-denominated debt.
However, contingent liabilities remain high, particularly with exposure to public institutions and state-owned enterprises like Transnet, which continues to struggle despite a recovery plan.
Inflation Pressure Eases: Inflation has moderated, with the headline rate falling to 4.6% in July 2024. Fitch expects further easing, with inflation projected to drop to 4.5% by the end of 2024 and 4.0% in 2025 and 2026.
The South African Reserve Bank may shift to a point target for inflation, with potential for rate cuts under the revised target.
Rising Current Account Deficit: South Africa's current account deficit is expected to widen to 2.4% of GDP in 2024, stabilizing at 2.6% in 2025 and 2026.
Import growth is likely to outpace export growth due to increased domestic demand, driven by the easing of energy constraints and reduced policy uncertainty.
Financing Resilience: South Africa's fully flexible exchange-rate regime, the high liquidity of the rand in international markets, and the strong domestic fund-management industry contribute to the country's resilience against external shocks.
Rating Sensitivities
Negative Factors: Further significant increases in government debt-to-GDP or a weakening of trend growth could lead to a downgrade.
Positive Factors: Sustained fiscal consolidation and stronger medium-term growth prospects could lead to an upgrade.
Sovereign Rating Model and Qualitative Overlay
Fitch's proprietary Sovereign Rating Model assigns South Africa a score equivalent to a 'BB+' rating.
However, adjustments were made to reflect South Africa's weak growth prospects and continued uncertainty about the government's ability to stabilize debt levels.
Comments