Overview

• Rising private sector electricity generation will likely ease South Africa's energy shortages from 2025, but ongoing logistics bottlenecks could continue to constrain medium-term growth prospects.
• Given revenue underperformance and higher-than-planned expenditure, we expect the pace of debt accumulation to be faster than we previously forecast.
• That said, South Africa benefits from access to deep domestic markets and concessional funding, and an actively traded currency.
• We affirmed our 'BB-/B' foreign currency and 'BB/B' local currency long- and short-term ratings on South Africa and maintained the stable outlooks.

Rating Action

On Nov. 17, 2023, S&P Global Ratings affirmed its 'BB-/B' long- and short-term foreign currency and 'BB/B' local currency sovereign credit ratings on South Africa. The outlooks are stable.

Outlook

The stable outlooks on the foreign and local currency ratings balances South Africa's credit strengths--particularly a credible central bank, a flexible exchange rate, an actively traded currency, and deep capital markets--against infrastructure-related pressures on growth, and downside risks to the fiscal and debt position.

Downside scenario

We could lower the ratings if the ongoing implementation of economic and governance reforms does not progress as planned, resulting in a further deterioration in economic growth, or higher-than-expected fiscal financing needs. This could, for example, result from a worsening of critical infrastructure constraints.

Upside scenario

We could raise the ratings if there is an improving track record of effective reforms, resulting in a structural strengthening of economic growth alongside reductions in public debt and contingent liabilities.

Rationale

Given revenue underperformance and higher spending, we forecast that South Africa's consolidated fiscal deficit will rise to nearly 5% of GDP in fiscal 2023 (ending March 31, 2024). Lower revenue owing to softening commodity prices and rising spending pressures from the wage bill, potential support to financially weak state-owned entities (SOEs), the Social Relief of Distress (SRD) grant, and debt service expenditure, will drive steady debt accumulation over the forecast period through fiscal 2026. By March 31, 2027, we expect gross general government debt will increase to 83% of GDP and interest costs will rise to 20% of general government revenue on average, higher than our previous estimates of 79% and 19%.

Private-sector investment in power generation and renewables is picking up and will support the strengthening of real GDP growth to average 1.6% over 2024-2026. However, electricity shortages, alongside bottlenecks across the rail network and at ports, will continue to weigh on economic output. We project that growth on a per capita basis will stay under 0.5% annually over the next five years. Higher imports required for energy generation and deteriorating terms of trade will also increase the current account deficit to an average of 2.8% of GDP over 2023-2026, increasing external financing needs.

That said, our rating on South Africa benefits from the country's sizable and sophisticated financial system that provides a deep funding base from which the government can meet its elevated financing needs. The country has relatively strong institutions, particularly its central bank, the South African Reserve Bank (SARB). In our view, the SARB's proactive monetary policy response has slowed the pace of consumer price increases and we expect inflation to remain in the central bank's 3%-6% target range.

Institutional and economic profile: Growth prospects depend on reforms to turn around the energy sector and infrastructure shortfalls

• We expect economic growth will slow to 0.8% in 2023 from 1.9% in 2022.
• Private-sector investment in electricity generation and renewables has significantly increased, but the implementation of reforms to address logistics bottlenecks and services delivery remains slow.
• Despite elections next year and a higher likelihood of the ruling Africa National Congress (ANC) party losing its majority, we expect broad policy continuity in our base case.

We forecast real GDP growth will slow to 0.8% this year followed by a pickup to 1.6% on average over 2024-2026 as more electricity supply comes onstream. Following 1.9% growth in 2022, the expansion decelerated to 0.9% in the first half of this year on account of disruptive power cuts and port and rail infrastructure bottlenecks. The SARB estimates that load-shedding alone will deduct two percentage points from growth this year. Another study by GAIN group calculated the economic cost of rail inefficiencies at 5% of GDP in 2023. Higher inflation and interest rates are also constraining consumption.

Bottlenecks at ports and problems with railways hinder South Africa's ability to get key exports to global markets, despite high prices over the past two years. Wholly government-owned Transnet remains the sole provider of rail transport for coal and other mining commodities to ports. The lack of capacity has seen rail transportation volumes drop by over 30% since 2018. Mining firms have resorted to transporting export commodities via road at higher costs or stockpiling excess production.

Although policy and reforms to address infrastructure deficits are ongoing, execution remains slow. The removal of limits on private-sector power generation and tax rebates of 125% on renewables have incentivized higher private investment. With additional energy capacity from renewables projected at 11,000 megawatts over the next three years, we expect power outages to ease from 2025. However, delayed investments and funding shortages at utility Eskom Holdings SOC Ltd. (Eskom), as well as issues around transmission and distribution, could risk the overall sector recovery.

We believe the ruling ANC could lose its parliamentary majority in the 2024 elections. Deteriorating economic conditions and poor service delivery are leading to strikes and protests, and this could translate into weaker support for the ruling party at the polls. If so, the ANC may form an alliance with smaller parties to reach a majority. If the vote for the ANC drops more significantly, it may need to form a coalition government with the Economic Freedom Fighters, a radical left-leaning party, or the Democratic Alliance, a centrist party that is ideologically different from the leftist factions of the ANC. Although this would increase political participation, wider coalitions remain untested at the national level. Already, coalitions at the provincial and municipal levels have been volatile, resulting in high turnover of mayors.

South Africa benefits from preferential trade access to the U.S. under the African Growth and Opportunity Act (AGOA). Escalations in tensions with the U.S. following allegations of weapons shipments from South Africa to Russia have eased, and the AGOA agreement was renewed for another year.

Flexibility and performance profile: Public debt will continue to rise as expenditure and revenue pressures intensify

• We forecast that the fiscal deficit will average 4.7% of GDP over 2023-2026, higher than our previous estimate of 4.1%.
• Contingent liabilities arising from financially weak SOEs, such as Transnet, are likely to remain a risk to the economy and the government's fiscal position.
• Inflationary pressures have started easing, and we expect the consumer price index will fall below the midpoint of the SARB's 3%-6% target range in 2025.

Fiscal risks have risen again as the effects of higher commodity prices on government revenue wane. The recently published Medium Term Budget Policy Statement (MTBPS) increased the consolidated fiscal deficit estimate for fiscal 2023 to 4.9% of GDP, from 4.0% in the 2023 budget. Lower corporate income taxes, primarily due to a fall in mining revenue, and higher value-added tax refunds will lead to an estimated revenue shortfall of 0.8% of GDP for the current fiscal year. At the same time, spending will be higher than budgeted because of an increased wage bill and debt servicing costs.

Over the medium term, the government aims to keep spending in check to narrow its general government deficits toward 3.6% of GDP in fiscal 2026. We expect some slippages in expenditure and therefore forecast an average deficit of 4.7% over the next four years, with 4.3% of GDP in fiscal 2026. The main upside risks to spending are as follows:

• Wages--The MTBPS targets a 3.6% rise in the wage bill on average over fiscals 2023-2026. We think the government is unlikely to reach an agreement with the unions that keeps wage increases below inflation (averaging 4.9% over the same period), similar to this year. That said, the government will partly offset the increase through measures such as a voluntary retirement scheme and hiring freezes.
• Transfers to SOEs--Given rising liquidity pressures at key SOEs including Transnet and the roads authority SANRAL, the government could introduce additional equity injections in the budget. Eskom could also require additional support beyond the current debt relief package.
• Goods and services--The government has significantly cut its costs on goods and services from previous targets to avoid a higher fiscal deficit. This could be challenging to implement, particularly in the lead up to elections next year.
• SRD grant--The government extended the SRD grant, introduced during the COVID-19 pandemic, for another fiscal year. It is likely that the grant will continue beyond fiscal 2024, and the MTBPS has set aside estimated costs for the grant in provisional allocations. Additional costs (not in our baseline scenario) could accrue if the number of participants in the program increases, or if the grant is expanded in scope.

Higher-than-expected fiscal deficits, along with a debt relief package for Eskom, will lead to gross general government debt rising to 83% of GDP by fiscal 2026, from 72% in fiscal 2022. Our debt forecasts are higher than the government's, which stabilize at 77% of GDP in fiscal 2025.

The government announced a sizable debt relief package for Eskom in February 2023 amounting to South African rand (ZAR) 254 billion (about 3.5% of GDP). The relief is earmarked for Eskom to repay its upcoming debt obligations and meet financing needs over the next three years. Government support is in the form of convertible loans from the National Treasury to Eskom amounting to ZAR78 billion (1% of GDP) in fiscal 2023, ZAR66 billion (0.9%) in fiscal 2024, and ZAR40 billion (0.5%) in fiscal 2025. The government will also transfer another ZAR70 billion (0.9%) of Eskom's debt directly onto its balance sheet in fiscal 2025. To reduce moral hazard, the package is conditional and Eskom will have to pay interest on the loans if it does not meet set conditions.

We view South Africa's contingent liabilities as significant, even considering the announced Eskom package. The government has exposure to SOE guarantees worth ZAR396.1 billion (6.0% of 2022 GDP) as of March 31, 2023; Eskom's guaranteed exposure is ZAR337.8 billion (5.1% of 2022 GDP). In recent years, the government has had to settle guaranteed loans and recapitalize South African Airways, Denel, and Land Bank. It is unclear how and when the government will support Transnet to help it meet its funding needs. Discussions are ongoing, and we think it is likely to involve a mixture of guarantees and equity injections. Transnet's total debt stood at 1.9% of GDP as of March 31, 2023.

Although public finances are strained, deep domestic capital markets and increasing concessional financing from multilateral institutions from a low base should provide adequate funding sources for the government. Banks' exposure to the government has risen to 15% of total assets as of June 30, 2023, from less than 10% in 2015. This level remains lower than that of peers such as Brazil, Mexico, and Turkiye. We think there is still room for banks to continue to absorb additional government debt. Foreign-currency-denominated debt remains under 10% of the government's total, limiting its sensitivity to currency movements.

The authorities aim to reduce the weighted cost of funding and have issued more floating-rate notes and shorter-tenor local currency instruments. They are also using cheaper concessional financing from international financial institutions such as the World Bank, African Development Bank, and New Development Bank. Furthermore, the government received concessional loans totaling €600 million for Just Transition from the French Development Agency and KfW Development Bank. The authorities intend to utilize about $3 billion of their foreign currency cash balances at the SARB to meet some foreign debt repayments.

We forecast that South Africa's current account deficit (CAD) will average 2.8% of GDP over 2023-2026, from a 0.5% deficit in 2022 and 3.7% surplus in 2021. The sharp reversal is expected largely because of a marked rise in imports, while commodity exports remain restricted by falling prices, insufficient rail capacity and breakdowns, and bottlenecks at the ports.

Nevertheless, South Africa's overall net external creditor position and moderate gross external debt provide a buffer against rising global headwinds. Nonresidents have reduced their holdings of local currency government debt to about 25%, from 40% in 2017. The reduction in holdings stems from weak public finances and lower global demand for emerging market debt.

Easing inflationary pressures in recent months led the SARB to pause interest rate hikes. Inflation averaged 6.0% in the first nine months of 2023 and has slowed to below 5.5% since June 2023. The SARB kept its policy rate unchanged at 8.25% after a 50-basis-point increase in May 2023. We expect inflation to slow toward the midpoint of the SARB's 3%-6% target range in 2025 as international food prices continue to moderate while oil prices remain flat in our assumptions. However, there could be some near-time upside to inflation if the Israel-Hamas war escalates and affects oil prices.

South Africa's generally sound and well-capitalized banking system will face pressure as the economy slows in 2023. We expect credit growth to average 5.0% over the next four years, versus 9.6% in 2022, due to tight credit conditions through 2023. Elevated household leverage is a source of risk for banks, primarily via vehicle and asset financing and personal loans.

On Feb. 24, 2023, global anti-money-laundering and terrorism financing watchdog the Financial Action Task Force placed South Africa on its increased monitoring list (gray list). We believe the gray listing has slightly raised financial transaction and compliance costs for smaller financial institutions. However, it is unlikely to significantly affect South Africa's creditworthiness (see "South Africa's Risk From FATF's Grey Listing Depends On Institutional Reform Momentum," published Sept. 8, 2022, on RatingsDirect).

Key Statistics

Table 1

Ratings Score Snapshot

Table 2

Related Criteria

• General Criteria: National And Regional Scale Credit Ratings Methodology, June 8, 2023
• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research

• Sovereign Ratings History, Nov. 15, 2023
• Sovereign Ratings List, Nov. 15, 2023
• Transnet SOC Ltd. 'BB-' Ratings Affirmed; Outlook Negative; SACP Revised To 'b' On Reassessed Competitive Position, Nov. 13, 2023
• S&P Global Ratings Has Raised Its Henry Hub Natural Gas Price Assumptions For 2024 And 2025, Nov. 7, 2023
• Sovereign Ratings Score Snapshot, Nov. 7, 2023
• Sovereign Risk Indicators, Oct. 9, 2023. An interactive version is also available at www.spratings.com/sri.
• Global Sovereign Rating Trends Midyear 2023: Fragile Stability, July 5, 2023
• Default, Transition, and Recovery: 2022 Annual Global Sovereign Default And Rating Transition Study, April 28, 2023

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Regulatory Disclosures

• Primary credit analyst: Zahabia Saleem Gupta, Director
• Rating committee chairperson: Roberto Sifon-arevalo
• Date initial rating assigned: Oct. 3, 1994
• Date of previous review: March 8, 2023

Disclaimers

This rating has been determined by a rating committee based solely on the committee's independent evaluation of the credit risks and merits of the issuer or issue being rated in accordance with S&P Global Ratings published criteria and no part of this rating was influenced by any other business activities of S&P Global Ratings.

This credit rating is solicited. The rated entity did participate in the credit rating process. S&P Global Ratings did have access to the accounts, financial records and other relevant internal, non-public documents of the rated entity or a related third party. S&P Global Ratings has used information from sources believed to be reliable but does not guarantee the accuracy, adequacy, or completeness of any information used.

Materials Used In The Credit Rating Process: Sufficient information in general consists of both (i) financial statements that describe the Issuer's financial condition, results of operations and cash-flows, and (ii) a description of the activities and obligations of the entity including of its governance and legal structure.

This credit rating was disclosed to the rated entity or related third party before being issued.

S&P Global Ratings' regulatory disclosures (PCRs) are published as of a point-in-time, which is current as of the date a Credit Rating Action was last published. S&P Global Ratings updates the PCR for a given Credit Rating to include any changes to PCR disclosures only when a subsequent Credit Rating Action is published. Thus, disclosure information in this PCR may not reflect changes to data within PCR disclosures that can occur over time subsequent to the publication of a PCR but that are not otherwise associated with a Credit Rating Action. Note that there may be instances where the PCR reflects an updated Ratings Model version in business use as of the date of the last Credit Rating Action although use of the updated Ratings Model was deemed unnecessary to produce that Credit Rating Action. For example, this may occur in the case of event-driven reviews where the event being assessed is considered to be not relevant to running the updated Ratings Model version. Note also that, in accordance with applicable regulatory requirements, S&P Global Ratings evaluates the impact of material changes to Ratings Models and, where appropriate, issues revised Credit Ratings where necessitated by the updated Ratings Model.

Glossary

• Consumer price index (CPI): Index of prices of a representative set of consumer goods regularly bought by a typical household.
• Current account balance: Exports of goods and services minus imports of the same plus net factor income plus official and private net transfers.
• Current account receipts (CAR): Proceeds from exports of goods and services plus factor income earned by residents from non-residents plus official and private transfers to residents from non-residents.
• Date initial rating assigned: The date S&P Global Ratings assigned the long-term foreign currency issuer credit rating on the entity.
• Date of previous review: The date S&P Global Ratings last reviewed the credit rating on the entity.
• Debt burden assessment: Reflects a sovereign's prospective debt level, as indicated by the general government debt relative to GDP (including assessment of contingent liabilities), the interest cost of the debt relative to general government revenue, and debt structure and funding access.
• Depository corporation claims: Claims from resident depository corporations (excluding those of the central bank) on the resident nongovernment sector.
• Economic assessment: Based on the analysis of economic structure and growth prospects. Reflects income levels (GDP per capita), economic growth prospects, and economic diversity and volatility.
• ESG credit factors: Those environmental, social, and governance (ESG) factors that can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis. These credit factors can have a negative or positive impact on creditworthiness, depending on whether they represent a risk or an opportunity.
• External assessment: Based on the analysis of external liquidity and international investment position as well as the status of a sovereign's currency in international transactions. Reflects a country's ability to obtain funds from abroad necessary to meet its public- and private-sector obligations to non-residents.
• Fiscal performance and flexibility assessment: Reflects the sustainability of sovereign's fiscal deficits. Based on the prospective change in general government debt, calculated as a percentage of GDP, taking into account long-term trends and a government's fiscal flexibility and vulnerabilities.
• Foreign direct investment (FDI): Direct investment by non-residents.
• GDP per capita: GDP divided by population.
• General government: Aggregate of the national, regional, and local government sectors, including social security and other defined benefit public-sector pension systems, and excluding intergovernmental transactions.
• General government debt: Debt incurred by national, regional, and local governments and central bank debt.
• General government interest: Interest payments on general government debt.
• General government liquid financial assets: General government deposits in financial institutions (unless the deposits are a source of support to the recipient institution), widely traded securities, plus minority arms-length holdings of incorporated enterprises that are widely traded plus balances of defined-benefit government-run pension plans or social security funds (or stabilization or other freely available funds) that are held in bank deposits, widely traded securities, or other liquid forms.
• Gross domestic product (GDP): Total market value of goods and services produced by resident factors of production.
• Gross external financing needs: Current account payments plus short-term external debt at the end of the prior year, including non-resident deposits at the end of the prior year plus long-term external debt maturing within the year.
• Institutional assessment: An analysis of how a government's institutions and policymaking affect a sovereign's credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks. Reflects the effectiveness, stability, and predictability of the sovereign's policymaking and political institutions; transparency and accountability of institutions, data, and processes; the sovereign's debt payment culture; and security risks.
• Monetary base: Local currency in circulation plus the monetary authority's local currency liabilities to other depository corporations.
• Monetary assessment: The extent to which a sovereign's monetary authority can fulfil its mandate while supporting sustainable economic growth and attenuating major economic or financial shocks. Based on the analysis of the sovereign's ability to coordinate monetary policy with fiscal and other economic policies to support sustainable economic growth; the credibility of monetary policy, and the effectiveness of market-oriented monetary mechanisms.
• Narrow net external debt: Stock of foreign and local currency public- and private-sector borrowings from non-residents minus official reserves minus public-sector liquid claims on non-residents minus financial sector loans to, deposits with, or investments in non-resident entities.
• Net general government debt: General government debt minus general government liquid financial assets.
• Net external liabilities: Total public- and private-sector liabilities to non-residents minus total external assets.
• Official reserves: Monetary authority liquid claims in foreign currency (including gold) on nonresidents.
• Real GDP per capita: Constant-price per capita GDP.
• Terms of trade: Price of goods exports relative to price of goods imports.
• Usable reserves: Official reserves minus items not readily available for foreign exchange operations and repayment of external debt.