South Africa Could Regain Investment Grade Status

According to experts on South Africa’s economy, the country stands a good chance of regaining sovereign investment grade status by 2028. Next week, the South African Minister of Finance, Enoch Godongwana, will lay out his mid-term budget and he is expected to confirm continuing growth in the country’s budget surplus. He is also expected to give details on a fiscal framework that ensures long-term discipline. Coupled with expected budget surplus growth, this should help propel the country toward an upgrade in its sovereign credit rating.

Experts suggest that the upcoming budget announcements need to confirm debt service costs have topped out and will start to head south, whilst debt to GDP is on or expected to decline. Spreads in the Credit Default Market* suggests that financial markets are expecting two ratings companies, Moody’s Ratings and S&P Global ratings, to move South Africa’s current rating up one notch to just below investment grade status. Both Moody’s and S&P have given a “positive outlook” (up from stable) to South Africa’s credit assessment together with a current rating of Ba2 and BB respectively, with expected upward movement to Ba1 and BB+ respectively.

*Credit Default Swap spread (CDS) – When a country’s sovereign credit rating increases (or is expected to increase), its CDS spread narrows. A lower CDS spread means the market views the country/nation as less likely to default on financial obligations, reducing the annual insurance cost paid to protect against its debt. 

A CDS is a financial derivative that allows an investor to transfer or “swap” the credit risk of a borrower with another party. A CDS is obtained by entering into a bilateral OTC (Over-the-Counter) derivative contract with an institutional counterparty such as a bank, a hedge fund or financial institution. JPMorgan Chase is currently widely recognised as the most active global dealer and writer of Credit Default Swaps, whilst other key market players are Goldman Sachs, Morgan Stanley and Citigroup. 

For credit rating purposes, a more relevant measure of the debt service burden is interest costs as a percentage of consolidated government revenue. Experts note that this figure should land close to the 11% mark. Experts confirm that South Africa’s figures have been around the 18% – 19% mark, and the government will have to demonstrate that they are able to reduce this number. Analysts are suggesting a medium-term range of 16% – 17% would likely support a move by the rating companies to move the country back to an investment grade rating.