Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of South Africa (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BB and Stable Outlook; short-term local- and foreign-currency issuer ratings: S-3/Stable Outlook) on 26 March 2024.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

For the updated report accompanying this review, click here.

South Africa’s BB credit ratings reflect multiple credit strengths, including: i) the size, sophistication and diversification of the domestic economy – among the largest of the African continent; ii) a favourable structure of the public debt, including long average maturities, debt denominated predominantly in domestic currency and a diverse domestic and foreign investor base; iii) a robust monetary-policy framework; and iv) resiliency of the domestic banking system and deep capital markets. The rating furthermore considers South Africa’s weight in regional and international financial institutions and associated access to bilateral and multilateral funding channels.

The outstanding challenges for South Africa’s credit ratings include: i) a rising debt burden driven by elevated headline deficits and a crystallisation of contingent liabilities; ii) modest economic-growth potential, enervated by an unsatisfactory energy and transport infrastructure and associated problems of economic competitiveness; iii) governance challenges; and iv) socio-economic vulnerabilities such as elevated unemployment and income inequality hindering fiscal consolidation and structural-reform momentum.

Despite recent robust government-revenue performance, spending increases expected over the forthcoming years due especially to rising debt-servicing costs, outstanding social-spending programmes as well as support for state-owned enterprises, such as debt relief for Eskom until fiscal year (FY) 2025-26, is anticipated to impede South Africa’s fiscal-consolidation process and keep the public-debt ratio on an increasing path – exceeding 80% of GDP by 2026. This contrasts sharply against government expectations for debt to begin a structural decline by FY2025-26. The planned draw-down of monies from the South African Reserve Bank’s Gold and Foreign Exchange Contingency Reserve Account – announced in the 2024 Budget – curtails the slope of this rise of debt for the next several years but does not constitute a structural solution for fiscal sustainability.

South Africa launched adoption of a comprehensive and ambitious reform agenda – the so-called Operation Vulindlela – since October of 2020, aiming to effectively address core macro-economic challenges. The adoption of reforms, nevertheless, remains a work in progress and the medium-run economic growth potential estimate for the economy (1.5%) has so far been left unchanged by Scope. Power outages and infrastructure (especially in rail) bottlenecks alongside rigidities in labour markets remain credit constraints. After a slowdown last year to estimated growth of 0.6%, Scope expects modest growth of 1.0% in 2024 and 2025.

Forthcoming elections scheduled for 29 May are expected to be determinative for economic-reform, fiscal-consolidation and governance outlooks – and, as a result, inform the rating trajectory for the coming years.

The Stable Outlook for South Africa reflects Scope’s present view that risks to the ratings are balanced.

The ratings/Outlooks could be downgraded if, individually or collectively: i) the public-debt burden continues to rise due, as an example, to delays in budgetary consolidation, further rises in the interest burden and/or additional support being demanded for state-owned enterprises; ii) the economic-growth outlook stays impaired, exacerbating socio-developmental challenges; iii) the external-sector risk profile weakens, such as a material decline in foreign-currency reserves and/or significant depreciation in the rand; and/or iv) governance challenges were to escalate after 2024 general elections.

Conversely, the ratings/Outlooks could be upgraded if, individually or collectively: i) sustained fiscal consolidation raises confidence that the public-debt ratio will be stabilised medium run; ii) reforms addressing long-standing fundamental challenges enable a material rise in economic-growth potential and countering of socio-economic risks; and/or iii) external-sector risks are redressed, such as a significant bolstering of foreign-currency reserve stocks.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Dennis Shen, Senior Director

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