S&P is scheduled to review South Africa’s sovereign ratings on 19 May 2023.

A “Stable” outlook may still be appropriate at this time, despite some negative headline risks

• On 8 March 2023, S&P revised its rating outlook to “Stable” from “Positive” to reflect the rising risks to growth due to persistent electricity shortages and rail and port logistics constraints. Meanwhile, uncertainty on fiscal expenditure prevailed from the public-sector wage bill.
• Prior to this, the agency was buoyed by positive trends in tax revenue collections, which gave the sovereign more fiscal space than previously anticipated, while its external position remained solid relative to peers’. This may have allowed S&P the opportunity to eventually remove the one-notch negative adjustment it made to the “initial rating score of ‘BB’”. However, S&P has since had to dial back its expectations and had updated the statement of the driver of its negative notch of flexibility to reflect its concerns.
• While it is possible (50/50 chance) that the rating committee might see the balance of risks biased to the downside in terms of growth and fiscal consolidation, we do not yet see material revisions to its forecasts as a new base case. We think the rating action taken in March 2023 and updated data after the IMF Annual Meetings sufficiently anticipated some of these negative trends.
• We think S&P will likely move its outlook to “Negative” if it has a clearer view on outer-year forecast trends on the primary budget balance, the pace of debt accumulation and GDP per capita growth and wealth levels (in USD terms). These are dependent on the extent of observed deviation in fiscal expenditure from what was set in the 2023 Budget and any material changes in the borrowing requirement. Furthermore, it is also dependent on a sustained weakening in the rand.
• We have witnessed a material depreciation in the rand since 4Q22, which could translate into lower wealth levels should the rand remain structurally weak for the medium term, while a recession and still-slow progress on reforms could tip the credit trajectory more definitively. In our view, our base case is not to extrapolate current rand weakness just yet. Rand weakness has been substantial in recent days, and a pullback in the USDZAR is possible, but is dependent on how headline risks materialize around the electricity reliability and the US’s reaction to the country’s relationship with Russia. For context, our USDZAR fair-value estimate range is 16,20-16,70.
• We set out our rating sub-score transition scenarios in Exhibit 1 below. Ultimately, the key sensitivity at this time is GDP per capita and this risk was originally adjusted for using a negative notch of flexibility. It is possible (not our base case) that S&P could move to adjust this risk within its Economic Assessment component (as opposed to a negative notch of flexibility) which would result in a lowering of its indicative rating to ‘bb-’ from ‘bb’. However, this will ultimately be neutral for the final issuer credit rating at “BB-”; which is why we do not think a negative outlook or downgrade is appropriate at this time.
• Overall, we think time is required for headline risks to materialize. We believe that the MTBPS may be an appropriate time to review these medium-run structural trends and see through the current market volatility.
• While the market is speculating about the probability of a total blackout, or an electricity grid collapse, we do not think S&P can anticipate this with specificity for its growth outlook, institutional assessment, fiscal position or the country’s external position more than it already has in the last rating action. We do not believe it enters its model as a base-case scenario. However, if the event materialises, it would be dealt with on an event-driven basis, in our view.
• Similarly on the controversial geopolitics of South Africa and Russia, following the statements made by the US Ambassador to South Africa. Until there is an official policy stance affecting trade or diplomatic relations, we do not think S&P can pre-empt the outcomes on the institutional assessment and in growth, or fiscal or external position metrics with any certainty.