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South Africa could move towards an even deeper junk credit rating this week by losing the only stable outlook on its debt assessments.
Of 23 respondents in a Bloomberg survey, 12 expect S&P Global Ratings to change its outlook on the country’s credit rating to negative from stable on Friday.
That means the next move by the company, which already evaluates South Africa’s foreign currency debt at three notches below investment grade, could be another downgrade. That would lead the country to a single B rating and signal a higher probability of default.
The nation’s debt assessment is at the lowest level since it first obtained credit ratings 26 years ago.
Most respondents expect Moody’s Investors Service, also on Friday, to drop its assessment at one notch below investment grade and do not see Fitch Ratings, which is two notches in junk, downgrading this year.
While that would please Finance Minister Tito Mboweni, who said last month that South Africa had already been “punished enough” with downgrades during the coronavirus pandemic, the outlook for ratings next year will depend on the Treasury’s ability to cut spending, cut the budget deficit, and knock down the path of debt growth.
Mboweni’s medium-term budget last month showed plans to cut the government’s wage bill, which has risen 51% since 2008 and is now 11% of gross domestic product.
However, that runs the risk of a backlash from politically influential labor groups already trying to force the government to honor a previously agreed wage deal through the courts.
What the Bloomberg economist says …
“The path of fiscal consolidation of the National Treasury, although slower, continues to be ambitious. It depends on reductions in the wage bill that have historically been difficult to achieve and growth-boosting reforms that are still scarce in detail.
“The rating agencies may choose to wait for the February budget and the December court outcome on the ongoing dispute to freeze wages this year as it sets the stage for the next round of negotiations.”
– Boingotlo Gasealahwe, African economist
The nation’s track record in negotiating wage deals in line with budget assumptions is weak and there is limited room to offset measures in other areas of spending, Fitch said last month in response to the budget update.
Moody’s could delay “the downgrading of South Africa now to await the results of the pay deals and see if the government is committed to fiscal consolidation,” said Elna Moolman, an economist at Standard Bank Group Ltd.
“Any disappointment in this regard could affect the rating in early 2021.”
Further cuts would increase debt service costs that are expected to grow an average of 16.1% over the next three years, complicating fiscal consolidation efforts.
The economy is projected to contract further in nine decades this year. It is expected to remain subdued and fiscal consolidation is likely to be slow, Moody’s said last month. The budget does not detail steps to boost growth and halt the deterioration in public finances, the company said.
“The budget for February 2021 will probably give rating agencies a better picture of how realistic the proposed fiscal consolidation might be, and are therefore more likely to take decisive action in 2021 if fiscal stress shows little or no sign of resolution, ”said Mike van der Westhuizen, portfolio manager, Citadel Investment Services.
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