S&P Global has downgraded South Africa’s credit ratings outlook from positive to stable as the continuing rotational load shedding weighs on economic activity.
This is a setback to the country’s outlook after S&P had upgraded it to positive in May last year. It had come with the hope of an upgrade of the country's credit rating in the near future.
S&P issued its ratings update late on Wednesday night, saying economic growth in South Africa was facing increasing pressure from infrastructure constraints, particularly severe electricity shortages.
The rating agency affirmed South Africa's long-term foreign and local currency debt ratings at “BB-” and ‘BB’, respectively, meaning the country was rated below investment level.
However, it warned that it could lower them if the government's reforms to address the power crisis did not progress as planned.
In addition, S&P pointed to the slow implementation of reforms to address infrastructure shortfalls and improve governance and performance at state-owned enterprises.
“Reforms to address infrastructure shortfalls and to improve governance and performance at SOEs are slow, weighing on growth, while contingent liabilities from SOEs pose continued downside risks to South Africa's fiscal and debt position,” it said.
However, the agency acknowledged that the fiscal position improved in the 2022 fiscal year as revenue rose, thanks to the growth recovery following the 2020 recession.
This was due to relatively high metals and minerals prices, and rising profitability in the finance and manufacturing sectors.
The ratings outlook is likely to upset South Africa’s growth outlook further as it points to further weaknesses to economic growth and the government’s likeliness to repay its debt.
The economy is teetering on the brink of a technical recession if growth contracts again in the first quarter of 2023 after shrinking by 1.3% in the final quarter of 2022.
In response to the challenges observed by S&P, the National Treasury said the government acknowledged that higher economic growth and a durable recovery in economic activity required a stable macroeconomic framework, complemented by rapid implementation of economic reforms and improved state capability.
“Government is taking urgent measures to reduce load shedding in the short term and transform the sector through market reforms to achieve long-term energy security. Other reforms are under way to improve performance in the transport sector, in particular freight rail,” the Treasury said.
“In addition, fiscal consolidation measures have positioned the public finances to absorb a portion of Eskom debt, maintain support for the economy and the most vulnerable, and make budget additions to fight crime and corruption.”
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