(Bloomberg) — Fitch Ratings unexpectedly upgraded its outlook on South Africa’s credit rating, providing some respite as the nation grapples with the economic damage wrought by a fourth wave of coronavirus infections.
The company kept the nation’s foreign- and local-currency ratings at BB-, three levels below investment grade, and changed the outlook to stable from negative. The move reflects “the faster than expected economic recovery, the surprisingly strong fiscal performance this year and significant improvements to key gross domestic product-based credit metrics” after the nation made changes to the way GDP is calculated, Fitch said in a statement Wednesday.
“A recovery is under way and GDP now seems on track to return to pre-pandemic levels during 2022, notwithstanding a 1.5% quarter-on-quarter contraction” in the third quarter, partly triggered by violent unrest in July, Fitch said. The agency expects the economy to grow 4.7% this year, 2% in 2022 and 2.4% in 2023.
“The pandemic continues to weigh on economic performance and remains a source of downside risk for public finances, but the likelihood of severe negative effects on creditworthiness has declined over the last year,” despite the emergence of the omicron variant and the rapid surge in new cases in South Africa, it said.
Virus Curbs
While it expects measures to be tightened to curb the spread of the virus, it assumes they would be short in duration and targeted, primarily hitting the hospitality industry rather than overall economic activity.
The outlook change comes a year earlier than Finance Minister Enoch Godongwana expected and signals that the downward trend in Fitch’s rating of South Africa may be reaching a turning point.
The stable outlook follows a medium-term budget buoyed by windfall mining revenue and an upward revision to GDP that showed debt is now forecast to peak at 78.1% of GDP — almost 10 percentage points lower than the government estimated in February — in the 2026 fiscal year. The consolidated budget deficit is also expected to narrow faster than previously expected.
“Government will continue to demonstrate its commitment to fiscal sustainability and enable long-term growth by narrowing the budget deficit and sizable debt,” National Treasury said Friday in a statement. Godongwana said last month that the government will use part of the higher tax revenue generated by the recent commodity price surge to narrow the shortfall, while increasing non-interest expenditure to support key spending priorities.
The rand traded little changed against the dollar at 7:58 a.m. local time Friday.
Tough Task
Still, Godongwana faces a tough task to rein in debt, reduce budget shortfalls and fast-track growth-enhancing reforms in an economy stuck in its longest downward cycle since World War II. His proposed fiscal framework could be undermined by demands for increased social support measures, international travel bans imposed after the discovery of the omicron variant in the country, concessions on government wages, on-going electricity supply constraints and policy uncertainty.
South Africa’s debt assessments by the three major firms are at their lowest levels since the country first obtained credit ratings in 1994. Moody’s Investors Service assesses it two steps below investment grade while S&P Global Ratings ranks it on the same level as Fitch.
