SA’s improved fiscal prospects could prompt ratings upgrade this week -- BER

South Africa’s improved fiscal numbers could result in a global credit rating upgrade later this week, according to the Stellenbosch University Bureau for Economic Research.  

Positive sentiment about Government’s inflation target and gross debt is likely to be felt way beyond the financial markets, which reacted favourably to Wednesday’s Medium Term Budget Policy Statement, BER said in a note to clients.

“The MTBPS may also be positive enough for S&P Global Ratings to lift our credit rating at its scheduled announcement later this week,” BER said.

“Our foreign debt is currently rated at BB-, three notches below investment grade, but importantly, with a positive outlook. Given the improved fiscal numbers (from a level perspective – the ratios to GDP show a higher debt peak) and signs of somewhat better growth momentum, an upgrade is possible. It would be a welcome vote of confidence, but certainly not guaranteed,” the note said.  

Finance Minister Enoch Godongwana on Wednesday confirmed a new inflation target of 3%, with a one percentage point tolerance band, while gross debt is expected to stabilise at 77% of GDP this year.  

BER said the inflation target meant the Treasury was now aligned to the Reserve Bank’s target, “making it easier for the Bank to guide the economy toward the new 3% target over the next two years, thereby reducing transition costs and enhancing the fiscal and economic benefits that will accrue over time.”

“It has the potential to set in motion a virtuous cycle of lower inflation and borrowing costs, leading to higher confidence and investment, stronger public finances and ultimately, faster growth. The initial reaction by financial markets was positive, with the rand moving decidedly stronger to the dollar,” BER said.  

Another noteworthy feature of the MTBPS was the emphasis on private investment and infrastructure reforms: “An entire chapter of the MTBPS is devoted to the infrastructure reforms that are underway to mobilise large-scale private investment, strengthen infrastructure delivery and improve the quality of spending. This is a central plank of the government’s strategy to foster faster growth and more reliable service delivery,” the BER note said.  

Media outlets on Wednesday reported widespread positive reaction to the MTBPS, which also featured encouraging news about tax revenue – better than expected – and lower total expenditure over the medium term.