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SA: Fitch Affirms South Africa at ‘BB-‘ with Stable Outlook

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Fitch Affirms South Africa at ‘BB-‘ with Stable Outlook
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Fitch Ratings has reaffirmed South Africa’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘, maintaining a Stable Outlook in its latest creditworthiness assessment. The rating reflects persistent economic challenges, including low real GDP growth, high levels of poverty and inequality, and an elevated government debt-to-GDP ratio.

According to Fitch, South Africa’s credit rating is limited by its rigid fiscal structure, which constrains efforts to reduce the deficit. However, the country benefits from a favourable debt structure with long maturities, mostly local-currency-denominated debt, strong institutions, and a credible monetary policy framework.

Fitch forecasts real GDP growth of just 0.9% in 2024, rising modestly to 1.5% in 2025 and 1.3% in 2026. This is considerably below the ‘BB’ median forecast of 3.2% in 2024 and over 3% in subsequent years. The country’s growth is hampered by deep-rooted structural issues, including inequality, poverty, unemployment, and weak investment, despite favourable demographics. The logistics sector continues to struggle, and electricity shortages, though expected to ease, remain a concern.

The South African government has been working on reforms under the Operation Vulindlela initiative, launched in 2020, which aims to modernize critical sectors like electricity, water, and transport. Fitch believes these reforms, led by the African National Congress (ANC) as the largest party in the government of national unity, will help boost growth but are unlikely to significantly alter the country’s low growth potential, currently estimated at 1%.

Fitch expects short-term political stability after the May 2024 general elections but warns that risks remain. Issues such as foreign policy, social grants, and national health insurance could become contentious, especially against the backdrop of the country’s extreme social inequality.

In terms of fiscal performance, Fitch forecasts a consolidated fiscal deficit of 4.7% for the fiscal year ending March 2025, largely unchanged from the 4.8% recorded in 2023. The agency predicts a gradual reduction in the deficit to 4.2% in 2025 and 4.0% in 2026, driven by a moderation in public service and transfer expenditures.

The South African government’s debt is projected to continue rising, reaching 76% of GDP in 2024 and peaking at 78% in 2026, well above the ‘BB’ median of 55%. Fitch noted that the government’s plan to withdraw ZAR150 billion from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) over FY24-FY26 has slowed the pace of debt accumulation but will not prevent debt from increasing over the medium term.

South Africa’s contingent liabilities remain substantial, with ZAR629.6 billion in government guarantees to public institutions, independent power producers, and public-private partnerships. The state-owned logistics company Transnet continues to face significant operational challenges, including theft, vandalism, and underinvestment. While a recovery plan announced in late 2023 has led to slight improvements, the company remains financially strained, with a net loss of ZAR7.3 billion, and is expected to require further government support.

Inflation has moderated, easing to 4.6% in July 2024, close to the middle of the South African Reserve Bank’s target range. Fitch forecasts inflation will decline further, reaching 4.5% by the end of 2024 and 4.0% in 2025 and 2026. The central bank has also hinted at a shift towards a point target of 3% inflation, with potential for interest rate cuts once this target is formally adopted, likely by early 2025.

Fitch also forecasts that South Africa’s current account deficit will widen to 2.4% of GDP in 2024, from 1.6% in 2023, and stabilize at 2.6% over the following two years. The relaxation of energy constraints and lower policy uncertainty is expected to drive stronger domestic demand, contributing to the deficit.

However, Fitch noted that the South African rand’s liquidity, the strong domestic fund-management industry, and the low share of foreign-currency-denominated debt all help protect the country from external shocks, reinforcing its ability to manage economic challenges.

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