Sovereign Africa Ratings (SAR) has rated South Africa at BBB long term and B+ short term with a
stable outlook (Average Investment Grade). The Outlook is regarded as stable for both the short and
medium term. The BBB rating represents South Africa’s adequate repayment capacity in terms of its
ability to meet its debt obligations.
Overview
• The SouthAfrican sovereign rating is underpinned by resilient macroeconomic and non-economic
fundamentals.
• South Africa’s trade with major trading partners bounced back post Covid-19 lockdown
disruptions. South Africa’s current account recorded a high surplus in March 2022 as compared to
December 2021 attributable to improved export performance and higher commodity prices.
• The financial sector is stable with banks holding adequate capital and the liquidity is sufficient for
external obligations.
• Tax revenue improved in 2021 and in the first two quarters of 2022.
• Natural resource endowments for South Africa remain a key asset for wealth generation, resource
rents and diversification of the economy.
• South Africa is facing headwinds in terms of rising interest rates, energy adequacy and prices as
well as increasing inflation prospects.
• The country’s fiscal position is relatively weak which is attributed to Covid-19-related spending in
2020 and 2021. Contingent liabilities, government guarantees to state-owned enterprises,
possible public sector wage bill and discussions of the universal basic grant can upset the gains
placed by government to manage and contain rising government debt.
• Environmental sustainability as captured by the just transition drive (decarbonisation) might
affect key mining and manufacturing industries.
• We are rating South Africa at BBB long term and B+ short term with a stable outlook.
The South African economy grew by an estimated 4.9% in 2021, driven by recovery in finance on the
supply side and fixed investment on the demand side. Headline inflation picked up to 4.5% in 2021
from 3.3% in 2020, on the back of higher food and transport prices, and the policy rate was therefore
increased to 3.75% in November 2021 from 3.5% in 2020. The budget deficit reached a record 10% of
gross domestic product (GDP) in 2020 due to additional expenditure to mitigate the impact of COVID. The fiscal deficit was estimated to have declined to 5.8% of GDP in 2021, reflecting higher revenue
and rationalised expenditure. The current account surplus was estimated at 3.8% of GDP in 2021 from
2% in 2020, attributable to improved export performance and higher commodity prices.
External reserves increased from $54.5 billion in July 2021 to $58.4 billion in August 2021 (about 5
months of import cover) boosted by the special drawing rights (SDR) allocation. South Africa’s total
public debt was estimated to have declined marginally to 70% of GDP in 2021 from 71% of GDP in
2020 given the fiscal consolidation. The financial sector is stable with banks holding adequate capital
– 15.8% in March 2020 and 18.07% in January 2022, compared with 18.04% in December 2021 – well
above the 10.5% minimum regulatory requirement. Poverty remains high, however, affecting 50% of
the population, with the unemployment rate recorded at 35% in August 2022.
The economy is projected to grow by 1.9% and 1.4% in 2022 and 2023 respectively, lifted by growth
in trade,tourism, mining, and manufacturing. Inflation is projected to rise to 5.8% in 2022 due to rising
oil prices and likely increases in food prices resulting from the Russia–Ukraine conflict, but to decrease
to 4.6% in 2023. The fiscal deficit is also projected to increase to 6.2% of GDP in 2022 before falling to
5.1% of GDP in 2023 due to the consolidation measures, including higher tax revenues and an educed
wage bill. The current account deficit is projected to be 1.4% of GDP in 2022 and to swing to a surplus
of 0.1% in 2023 due to the recovery in export demand and expected fall in commodity prices.
According to the National Treasury (2022), government expects to achieve a primary surplus where
revenue exceeds non-interest expenditure by 2023/24. In 2024/25, main budget non-interest
expenditure will grow slightly above CPI inflation. The consolidated budget deficit is projected to
narrow from 6% of GDP in 2022/23 to 4.2% of GDP in 2024/25. Gross loan debt will stabilize at 75.1%
of GDP in 2024/25. Debt-service costs consume an increasing share of GDP and revenue and are
expected to average R333.4 billion a year over the medium term.
Total consolidated government spending will amount to R6.62 trillion over the next three years, and
the social wage will take up 59.4% of total non-interest spending over this period. Additional
allocations of R110.8 billion in 2022/23, R60 billion in 2023/24 and R56.6 billion in 2024/25 are made
for several priorities that could not be funded through reprioritisation. These include the special
Covid-19 social relief of distress grant, the continuation of bursaries for students benefiting from the
National Student Financial Aid Scheme, and the presidential employment initiative. The bulk of the
spending is allocated to learning and culture (R1.3 trillion), social development (R1 trillion) and debt
service costs (R1 trillion) over the Medium-Term Expenditure Framework (MTEF).
Over the next three years, consolidated Government spending is expected to grow at an annual
average of 3.2%, from R2.08 trillion in 2021/22 to R2.28 trillion in 2024/25. As public debt stabilizes,
Government will progressively reduce debt and the burden it places on the economy.
Given the revenue improvement, Government proposes R5.2 billion in tax relief to help support the
economic recovery, provide some respite from fuel tax increases and boost incentives for youth
employment. Most of the relief is provided through an adjustment in personal income tax brackets
and rebates. In addition, there will be no increase in either the general fuel levy or the Road Accident
Fund levy. Progress continues to be made in rebuilding the South African Revenue Service.
The fiscal outlook is subject to significant risks. Elevated risks to the fiscal outlook include:
• A global and domestic economic slowdown, resulting in lower revenue and greater calls for
fiscal support.
• Rising borrowing costs due to inflation and higher global interest rates.
• The materialization of contingent liabilities from state‐owned companies.
• Higher‐than‐budgeted compensation increases.
Macroeconomic Performance
After two consecutive quarters of positive growth, real gross domestic product (GDP) decreased by
0,7% in the second quarter of 2022 (Q2: 2022). The devastating floods in KwaZulu-Natal and load
shedding contributed to the decline, weakening an already fragile national economy that had just
recovered to pre-pandemic levels. The South African economy has also been dealt a series of harmful
blows, including:
• The devastating floods in parts of KwaZulu-Natal, which damaged critical infrastructure and
business operations, affecting external trade in the process.
• Very frequent load shedding over prolonged time periods, which has been highly detrimental
to the South African economy and society.
• Strike actions in a number of critical sectors, including energy, transportation, and mining.
• Fast-rising prices at the producer and consumer levels, primarily but not exclusively driven by
imported inflation, which are affecting the spending capacity and propensity of households
and business enterprises.
• More aggressive interest rate hikes as the South African Reserve Bank’s (SARB) Monetary
Policy Committee seeks to anchor inflation expectations. Consideration for strategies to deal
with cost-push inflation may be considered by the Government as SAR views interest hikes to
be more suitable for demand-pull inflation.
• Stubbornly high unemployment rates and the low probability of meaningful job creation
materialising in the short term.
• Falling business and consumer confidence, as already captured in the respective indices for
the second quarter of 2022, with adverse repercussions on spending, production, and
investment activity.
• Increased uncertainty over the economy’s short-term prospects, with weaker rates of growth
now anticipated and a technical recession in 2022 becoming a reasonable possibility.
Rationale
SAR’s ratings take into account South Africa’s performance in terms of both macroeconomic and non economic fundamentals. The ratings take into account the direction and assessment of the South
African economy in terms of key indicators and variables such natural resource endowments, climate
change risks, social and socio-economic fundamentals, economic growth, government debt
(domestic and foreign currency denominated), gross loan debt and contingent liability profile,
budgetary performance and adequacy of fiscal flexibility, external performance, monetary and fiscal
policy stance, liquidity position and institutional and governance framework.
The ratings are also supported by the country’s reconstruction and recovery plan which aims to
address some of the country’s challenges such as high unemployment, poverty and income inequality,
energy, and water crises, as well as deteriorating infrastructure and logistics networks. In terms of the
government’s plans, the following priority interventions will be made:
• Aggressive infrastructure investment.
• Employment-orientated strategic localization, reindustrialisation, and export promotion.
• Energy security.
• Support for tourism recovery and growth.
• Green economy interventions.
• Mass public employment interventions.
• Strengthening food security; and
• Macroeconomic interventions.
See the full South Africa sovereign rating report on: http://www.saratings.com/