Fitch Ratings keeps SA rating at BB- but warns of low GDP growth

Fitch Ratings has affirmed South Africa’s default rating at BB- with a stable outlook thanks to the country’s favourable debt structure and progress on reforms.

It has however noted that the country’s rating is constrained by low real GDP growth, a high level of poverty and inequality, a high government debt/GDP ratio and a rigid fiscal structure that hampers deficit reduction.

The rating agency forecasts low real gross domestic product (GDP) growth of 0.9% in 2024, 1.5% in 2025 and 1.3% in 2026 compared to 0.7% in 2023. This forecast differs significantly from Fitch’s BB median forecast of 3.2% in 2024, 3.6% in 2025 and 3.5% in 2026.

“Growth is hampered by a struggling logistics sector, deeply entrenched structural factors, particularly high levels of inequality, poverty and unemployment and weak investment.

“We expect the weakness to persist, despite robust demographics. Electricity shortages, which dragged on growth in 2022 and 2023, are expected to ease, but sporadic incidents of load-shedding could still occur,” Fitch says in a statement on the rating.

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Moderate impact of progress on reforms

Fitch noted the moderate impact of progress on reforms, saying that the authorities continued to implement the 35 priority reforms under Operation Vulindlela, launched in 2020, which aim to modernise network industries, including electricity, water and transport.

“We expect the government of national unity (GNU) to continue the reform programme, which will contribute to a modestly increasing real GDP growth.

“However, we do not think the reforms will significantly raise South Africa’s low growth potential, which we estimate at 1%.”

Fitch said the formation of the GNU lowered short-term policy uncertainty.

“We consider the ANC and DA broadly aligned on key priorities, particularly on the growth-enhancing agenda.

“Nevertheless, risks to political stability remain, with some topics, such as foreign policy, social grants and the National Health Insurance (NHI), potentially contentious.

“Risks are exacerbated by South Africa’s exceptional level of social inequality.”

The agency also forecasts a consolidated fiscal deficit of 4.7% in the fiscal year ending March 2025 (Fitch-defined FY24), broadly unchanged from 4.8% in 2023.

It expects revenue to remain at around 27% of GDP over the next three fiscal years.

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Implementation of NHI Act and wages could be a problem

Fitch regards wages and the National Health Insurance Act, if implemented, to pose upside risks to its expenditure forecast, while stronger GDP growth could boost revenue.

Fitch forecast that government debt will remain high, with consolidated government debt continuing to increase, to 76% of GDP in the current financial year, 77.8% in the next financial year and 78.0% in the 2026 financial year, well above the 2024 ‘BB’ median of 55%.

However, this is a slower pace than Fitch anticipated in its January 2024 review, as government plans to withdraw R150 billion from its Gold and Foreign Exchange Contingency Reserve Account (GFECRA).

The GFECRA balance was R507.3 billion in January 2024, but Fitch says the temporarily reduced pace of debt accumulation does not affect its assessment that debt/GDP will not durably stabilise over the medium term.

The agency also points out that Transnet remains hampered by rolling stock shortages, theft, vandalism and years of underinvestment and mismanagement.

The 18-month recovery plan, announced in October 2023, enabled a small increase in railed and container volume, but Fitch says its net loss reached R7.3 billion and its financial sustainability is constrained by high leverage.

“We believe further government support is likely and we pencilled in a R50 billion below-the-line support in our debt projection, split between the financial years of 2024 and 2025.”

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Inflation expected to continue a downward trend

Fitch also expects that inflation will moderate further as food and oil prices continue on their slowdown and forecasts inflation to drop to 4.5% by the end of the year and 4.0% in 2025 and 2026.

About the country’s financing resilience, fitch says the fully flexible exchange-rate regime, the Rand’s high liquidity in international markets, the strong domestic fund-management industry and a high share of local currency in government debt help insulate the sovereign from external shocks.