S&P on South Africa: Upgrade needs growth

Last Friday, ratings agency S&P Global set a positive tone for South Africa by upgrading its outlook on the economy from stable to positive. The move was based on the progress on reforms following the establishment of the government of national unity. This positive development helped the rand recover from losses against the dollar, with the local unit still holding onto those gains. Zahabia Gupta, Director and Lead Analyst at S&P Global Ratings, joined CNBC Africa to discuss the latest report. The positive outlook indicates the potential for improved reforms and growth in the country. Gupta highlighted the importance of addressing key constraints around logistics, such as railways, ports, transmission grids, and the water sector to support business investment and overall economic outlook. S&P Global's optimistic outlook implies a one in three chance of an upgrade over the next year, contingent on the continuation of reform momentum. However, any reversal in reform progress could lead to a return to a stable outlook. The agency also revised the growth forecast for South Africa's economy from 1 percent to 1.4 percent over a three-year period. This growth is attributed to lower inflation, interest rates, and the two-part retirement system which is expected to boost consumption. Despite the increase, S&P Global's growth estimates remain lower than those of the National Treasury due to a less bullish outlook on investment. The focus is on current government announcements rather than potential future reforms, with the expectation that more reform momentum and private investment could lead to upward revisions in growth forecasts. Looking ahead, the key factors determining a ratings upgrade for South Africa include the quality of growth, private investment trends, progress on reforms, and fiscal performance. The economy's standing with key Western partners, particularly in relation to trade agreements like AGOA, also plays a role in the assessment. While contentious foreign policy issues may impact investor sentiment and trade relationships, the potential repeal of AGOA is not expected to have a significant economic impact on South Africa. Regarding the trajectory of government debt, S&P Global projects an increase to about 80 percent of GDP over the next three years, higher than the government's forecast of debt stabilization at around 75 percent of GDP. This projection factors in medium-term fiscal pressures like increased spending on wages, state-owned enterprises, and social relief programs. The impact of potential events such as bailouts for entities like Transnet and the implementation of a basic income grant is monitored in the fiscal assumptions, with growth performance playing a crucial role in determining the debt trajectory. Overall, S&P Global's positive outlook signals the growth potential for South Africa, contingent on sustained reform progress and fiscal prudence.