The budget deficit in South Africa is growing at an alarming pace
South Africa is suffering the economic consequences of the COVID-19 pandemic. The rating agency S&P Global Ratings has lowered the country’s foreign currency’s ratings. The agency now expects the economy to shrink by 4.5% during 2020, while the budget deficit is expected to reach 13.5% of South Africa’s GDP. The economic situation in South Africa has clearly worsened.
“We now expect the economy to shrink by 4.5% in 2020, partly due to a $29.3 billion (ZAR 500 billion) budget,” said Samira Mensah, credit analyst at S&P Global Ratings. In a new report recently released, the rating agency said it lowered the country’s foreign currency ratings from BB to BB- in April 2020.
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The economic sector in South Africa is in turmoil
The agency’s forecasts showed that the situation has worsened: “The budget deficit will reach 13.3% of GDP in 2020 due to lower tax revenues, already high budget expenditures in February 2020 and the COVID-19 support program,” Ms Mensah added.
The agency’s forecast for the South African banking sector is commensurate with the economic challenges ahead. “We expect the banking sector to contract as a result of the economic crisis and predict that credit to the private sector will decline by around 5% in 2020. We expect credit losses in the banking sector to increase to about 1.2% in 2020, mainly due to defaults on loans to individuals and small and medium-sized enterprises.”
S&P Global Ratings believes the financial sector will be offered stability by the liquidity measures taken by the Reserve Bank of South Africa
Nevertheless, noted S&P, the South African Reserve Bank’s liquidity measures will ensure the stability of the financial and banking sectors. “We downgraded our ratings on leading South African banks to “BB-” in early May 2020, but their standalone credit profiles remain at “bbb-“.
In addition, although insurance claims may increase due to COVID-19, S&P does not expect the losses to be significant. “Massive equity market sales and increased credit risk will likely put pressure on insurers’ earnings, but we do not expect this to significantly affect their capital levels,” analysts continued.
Insurers benefit from the support of significant capital backing commensurate with their risks and high liquidity. The local risk-based solvency regime has also encouraged insurers to improve their risk management practices. As a result, the solvency of the insurance sector is stronger than that of most other domestic sectors. “We are capping our global ratings on insurers to ‘BB’ ratings in local currency for South Africa,” the agency concluded.
The COVID-19 pandemic affected all economic sectors
The resilience of the corporate sector at COVID-19 reflects country-specific government measures and the response of consumers and businesses. Containment measures have affected transportation companies and retailers, particularly due to reduced customer activity.
Utilities (telecom, electricity, water and infrastructure) are more resilient, but the outlook for demand and accessibility is uncertain. Rating changes in the corporate sector reflect the extent of government support for state-owned enterprises; constraints on the ability to rate specific companies above the sovereign; and the compression of ratings at the national level, with a large proportion of national ratings being grouped into two or three rating levels.
(Featured image by 12019 via Pixabay)
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First published in Financial Afrik, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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