Finance Minister Enoch Godongwana said that South Africa should regain its investment-grade credit rating by 2027 and could exit junk status.
SA is currently rated below the investment grade with a stable outlook by all three major ratings agencies.
Standard & Poor's (S&P) credit rating for South Africa stands at BB- with a positive outlook, and Fitch also rated the country at the same level or denomination, in September 2024.
Moody's credit rating for SA was last set at Ba2 with a stable outlook in April 2022.
Godongwana made this statement on South Africa’s trajectory at the World Economic Forum in Davos, Switzerland and told Reuters that government is placing structural reforms at the top of its agenda to push economic growth.
He acknowledged that the three ratings agencies still have major reservations about SA’s growth and economy.
"As long as we have not turned around the growth outlook, the ratings agencies will still be skeptical about us," the minister said.
"That is why we are working hard on structural reforms, such as in the logistics and telecommunications sector, to transform growth. Once we see that growth in numbers, you will see the ratings agencies change," Godongwana concluded.
What does junk status mean?
Many South Africans may not understand what our junk status may mean and why it is so important.
A country's credit rating serves as an indicator of its government's creditworthiness, reflecting the likelihood of timely repayment of sovereign debt obligations.
According to FNB, these ratings are important because they influence the cost of borrowing.
“If a country is more likely to default, lenders will charge a higher interest rate to compensate for the greater risk, as they would if the borrower were an individual,” the bank explained.
Credit rating agencies do not measure the health of the local economy but instead, these organisations assess the government’s ability to honour debt commitments.
“These measurements take certain economic indicators into account and are themselves seen as indications of a country’s economic prospects,” FNB noted.
How does the junk status directly impact you?
A downgrade means that government now has to pay more in debt servicing costs and this means that it will have less to spend on social initiatives and infrastructure.
“In order to plug the funding gap, government will have to increase revenue through higher taxes. But the effects of junk status don’t end at borrowing,” FNB said.
Lastly, a downgrade can also lead to a rand depreciation, and this could drive up the price of imports like oil.
FNB explained that this makes everything else more expensive.
“When inflation rises above a designated target range, the Reserve Bank puts the repo rate up, which increases the cost of vehicle loans, mortgages, and other long-term loans,” the bank noted.
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