Credit and sovereign credit ratings

With interest rates rising, we believe the resilience in credit extended to households may play out twofold in 2023:

The first scenario is theoretical in the sense that during high-interest rate cycles, individuals tend to borrow less, spend less on credit cards, and take out fewer loans and mortgages.

However, the second scenario is more practical given the current cost-of-living crunch. Following a low-interest-rate cycle which resulted in increased savings, which has in part sustained most households as food and fuel prices rose, some households may take up credit to supplement diminishing disposable incomes. This will result in the continuation of robust credit growth, but there are default risks that lenders may need to consider.

South Africa’s sovereign credit rating will likely stay put this year with a possibility of a rating upgrade by some of the rating agencies. The year ahead will be clouded by political campaigns as we look to the 2024 election, meaning we can expect some fluctuations in the pace of policy reform implementation that should drive growth higher. The fiscal trajectory faces some risks if specific spending pressures exceed the unallocated and contingency reserves. However, National Treasury has built in some buffers in its latest spending estimates to help absorb any fiscal spending risks that may arise. Standard & Poor’s (S&P) currently rates South Africa’s foreign currency at BB- and the local currency rating at BB, with the outlook remaining positive. Moody’s has a rating of Ba2 with a stable outlook, while Fitch rates BB- also with a stable outlook.

South Africa’s growth prospects will weaken further this year before picking up to a still sluggish 1.4% in 2024 as both external and internal vulnerabilities widen. This is due to the expected weak economic activity in major trading partners, namely China, the euro area, the UK and the US, which accounts for over 40% of South African exports. In addition, current tight global financial conditions, and domestic political and policy uncertainty also pose risk for the economy. Further domestic policy tightening will temper domestic demand and fixed investment, while high unemployment and worsening power cuts will also weigh on growth. More so, the efficient implementation of the much-needed reforms to remove structural bottlenecks will remain sluggish.