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S&P Unexpectedly Cuts Outlook on South Africa’s Junk-Rated Debt

S&P Unexpectedly Cuts Outlook on South Africa’s Junk-Rated Debt

Ratings firm S&P Global has downgraded its outlook for South Africa from positive to stable, as the country gets pummeled by a slew of bad news.

In an unscheduled announcement on Wednesday (8 March), the rating agency cited the disastrous effects of load shedding on business across the country as one of the core reasons for the outlook change.

South Africa has faced power outages every day in 2023 so far, and has been suffering near-permanent rolling blackouts since September 2022.

The outages have had a material impact on businesses and households in the country, which has filtered through to economic data.

Stats SA this week revealed that South Africa’s economy contracted by 1.3% in the fourth quarter of 2022, with economists warning that another quarterly decline is expected in the first quarter of 2023 – pointing to a technical recession.

While the South African government has been promising to resolve load shedding since it first emerged 15 years ago, it has only been in the last year that plans have been put into action with some semblance of political will behind them. And even then, progress has been slow.

“Reforms to address infrastructure shortfalls and to improve governance and performance at state-owned enterprises (SOEs) are slow, weighing on growth, while contingent liabilities from SOEs pose continued downside risks to South Africa’s fiscal and debt position,” S&P said.

According to Reuters, the rating agency confirmed South Africa’s foreign currency sovereign credit ratings at ‘BB-/B’ but cautioned that if the government’s efforts to resolve the power crisis do not progress as expected, the ratings could be lowered.

Overall growth estimates for the year have also been revised by the South African Reserve Bank (SARB); the central bank now projects 0.3% growth based on the assumption that the country will experience 200 days of load shedding – a figure that is likely to be reached soon.

Credit agencies have been keeping a sharp eye on the country as international foreign investors lose interest.

On 15 February, another global agency, Fitch Ratings, said that the South African government’s poor reputation for meeting promises – especially those relating to load shedding – means that assurances on the crisis have the opposite effect.

During the latest State of the Nation Address (SONA) by President Cyril Ramaphosa, he declared a national state of disaster over the energy crisis with the aim to fast-track reforms and mitigate red tape – despite such initiatives, no short-term relief from load shedding has occurred.

A positive credit rating assists the country in signalling to the world that it has strong business and consumer sentiment – making it a more attractive foreign investment opportunity.

However, South Africa’s economy has been in sub-investment grade – known colloquially as ‘junk status’ – since 2017.

South Africa’s global reputation suffered another significant blow at the end of February, when the Financial Action Task Force (FATF) added the country to its grey list – a list of countries under scrutiny for being lax on anti-money laundering and combatting terrorism funding.

While being added to the grey list isn’t likely to push ratings agencies to downgrade South Africa deeper into junk in and of itself, it does exacerbate standing issues like load shedding, economic recession, high levels of unemployment, growing levels of civil unrest, slow government policy execution, and low business confidence.

See Also

Data from RMB/BER Business Confidence Index (BCI) on Wednesday showed a further decline in business confidence. The survey covers over 1,000 senior executives – and the metric has not been in positive territory for the better part of a decade.




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