South Africa’s outlook upgraded from negative to stable by Moody’s

South Africa’s outlook by Moody’s has been upgraded from “negative” to “stable” though still at Ba2 rating.

The credit rating agency previously rated South Africa at Ba2 (two rungs below investment grade), with a negative outlook which means the next step could potentially be another downgrade.

According to Moody’s, South Africa’s fiscal position has markedly recovered from the pandemic majorly due to high commodity prices, which boosted tax revenue, and the government’s fiscal consolidation measures. The government was also able to keep growth in the public sector wage bill to 1.6%, well below inflation.

“Indeed, over the last two fiscal years, the government has shown it was able to re-prioritize its spending while staying committed to fiscal consolidation, which Moody’s expects will remain the case going forwards.”

South Africa was dropped from its investment grade rating in 2020 by Moody’s, downgrading government bonds to  “junk” rating – which means there’s a bigger chance that the government won’t be able to pay back its debts.

“This marks an improvement compared to Moody’s previous projections of a long period of ever-rising debt-to-GDP.”

Government has managed to cut its primary deficit (the difference between its income and spending, excluding interest payments) to 1.3% of GDP over the past year, compared to Moody’s forecast of 3.4%.

Tax compliance, according to Moody’s, is likely to improve gradually as the South African Revenue Agency (SARS) rebuilds some of its institutional capacity.

The rating agency also noted that the Reserve Bank’s foreign-exchange reserves fully covered annual external debt payments. “The central bank has a long-standing policy of refraining from intervening to prevent depreciation, thereby preserving buffers.”

It however cautioned that the state-owned enterprises (SOEs) remain weak and pose risks to government’s debt burden.

The agency also expressed concern about the impact of load shedding on the South African economy.

“Moody’s expects these constraints to remain and forecasts GDP growth at only about 1.5% in the medium term.

“Very weak SOEs across a number of sectors, including electricity and transport, both contribute to weak growth and are affected by it, without any prospects of significant improvements in the foreseeable future.”

“Firm signs that the rehabilitation of the energy sector is underway would also be a key marker, pointing to higher growth and lower contingent liability risks from the SOEs sector.”

Ratings could be downgraded if growth prospects and government’s fiscal strength deteriorated.

In responding to the latest Moody’s rating, South Africa’s National Treasury said that government is using a part of its additional tax income (a windfall due to the high commodity prices) to pay off more debt, while most of it will go towards urgent social needs, including job creation through the presidential employment initiative, and supporting the public health sector.

“Faster implementation of economic and SOC [state-owned corporation] reforms, accompanied by fiscal consolidation to provide a stable foundation for growth, will ease investor concerns, and support a faster recovery and higher levels of economic growth.”

 

Source: news24.com