Michael started the conversation by suggesting that South Africa might be entering a period of upgrades. Chris gave a run-down of where SA stands now in terms of the big three ratings agencies: S&P, Moody’s and Fitch, which was summed up by Michael as “some way to go to regain that investment grade rating”.
The discussion covered the current context, including how debt-to-GDP projections had been reduced from about 95% of GDP in 2020 (the last time SA was downgraded) to last month’s projection of 72% (in the Medium-Term Budget Policy Statement), a “material improvement”.
Chris talked about some of drivers of this positive trajectory, such as the R111 billion Treasury had gained from the commodities windfall. He also touched on some of the risks to the upward trend, pointing to the strike announced by public sector workers this week over the 3% wage increase.
Chris gave a brief masterclass, contextualising what drives sovereign ratings in terms that will probably feel more relevant to listeners: personal credit ratings, and unpacked what drives ratings on a national level. He also talked to why sovereign rating decisions matter, including how they affect government debt costs and, therefore, government spending.
“If you have a higher cost of debt there is a negative feedback loop, in terms of how much government spending goes on repaying that debt versus how much can be spent on service delivery, or infrastructure spending to stimulate growth.”
Chris also reminded listeners that “in the South African context, all debt, whether that be corporate debt or even individual debt, is ultimately benchmarked against government cost of debt”.
“So, if the cost of SA government debt is lowered, you have this potential of the cost of debt for corporates and individuals being lowered, which can cause a ‘crowding in’ of investments to further add to that virtuous cycle.”
The episode ends with Michael and Chris touching on how different scenarios over the next few months (“rosy” and “bumble along”) might impact the markets.
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