S&P revises South Africa’s outlook from stable to positive

By Xolisa Phillip, in Johannesburg
Posted on Thursday, 26 May 2022 12:08

South African Rands
South African Rands REUTERS/Philimon Bulawayo

S&P Global Ratings has revised South Africa’s outlook from stable to positive, citing favourable trade, contained fiscal expenditure, and structural reforms.  

The credit ratings agency affirmed the sovereign’s long- and short-term foreign currency and local currency ratings.

In a sovereign review note released last week, S&P says it could raise the ratings if economic growth is higher than it currently expects, “and if we see continued fiscal consolidation, against a backdrop of structural and governance reforms and continued supportive external sector dynamics”.

Higher-than-expected tax revenue, particularly from mining companies, will help to reduce the fiscal deficit

S&P expects the South African economy to grow by 1.8% in 2022, and then “taper off to 1.7% on average over the next three years”.

Risks to South Africa’s outlook include domestic and external shocks, as well as the prospect of fiscal financing and external pressures rising, according to S&P.

“This could arise from further financing risks emanating from contingent liabilities, including the public utility Eskom, or tightening financing conditions increasing the government’s interest burden as a proportion of revenue,” S&P says.

South Africa is on track to record a moderate trade surplus in 2022, supported by the rise of key metals prices and mining exports – coal, iron ore, gold, and platinum group metals – since the start of the Russia-Ukraine conflict, according to the credit ratings agency.

“Higher-than-expected tax revenue, particularly from mining companies, will help to reduce the fiscal deficit and debt as a proportion of GDP relative to our expectations six months ago,” S&P says.

Limited benefits

S&P cautions, however, that a growth slowdown in China and higher oil prices, coupled with South Africa’s supply side and logistical constraints, could limit the benefits derived from the better-than-expected metals prices and mining exports.

The credit ratings agency has flagged the ongoing wage negotiations between the state and public sector unions as a fiscal risk.

Representing 1.3 million state employees – teachers, nurses, the police, and other professionals – public sector unions earlier in May tabled a demand for a 10% wage increase at the Public Sector Coordinating Bargaining Council.

“The double-digit increase [in] demand is informed by the fact that the global and domestic volatility of inflation has left workers struggling to keep up with the cost of living,” says the Congress of South African Trade Unions (COSATU) affiliates representing public sector employees in the bargaining council.

The unions have also tabled a demand that the government offer permanent employment contracts to community health workers and teacher assistants.

Our belief is that the wage bill is not the cause of country’s soaring debt levels

The state has rejected the unions’ 10% demand as it wants to give workers a R1,000 ($64) after-tax gratuity and a 1.5% wage increase. The state’s offer is in line with the government’s goal to lower the growth of the public sector wage bill.

However, the COSATU affiliates say: “Our belief is that the wage bill is not the cause of country’s soaring debt levels, but that economic stagnation, which comes from misguided policy choices, and lack of consequence management for entrenched corruption in the public sector [are to blame].”

Other risks highlighted by the credit ratings agency include the possible extension of the R350 social relief of distress grant payments.

Welcomed revision

The National Treasury welcomed S&P’s revision of South Africa’s outlook to positive.

The fiscus reaffirmed the commitments made in the 2021 medium-term budget policy statement and the February 2022 budget that a portion of the additional revenue takings would be used to stabilise debt.

The rest of the funds would go towards social needs, an employment initiative of the presidency, and public health, according to the National Treasury.

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