Despite an upgrade in its risk rating, South Africa is in the red when it comes to commercial risk specifically, the first edition of Allianz Trade’s Country Risk Atlas shows.
Ana Boata, the head of economic research at Allianz Trade, says the Country Risk Atlas provides comprehensive analysis and insights into economic, political, business environment, and sustainability factors that influence trends in non-payment risk for companies at a macroeconomic level.
“It aims to be a companion for businesses and investors in making informed decisions by identifying potential risks and opportunities in 83 different economies, along with the map we produce quarterly for all the 241 countries and territories we monitor every year,” says Boata.
In 2023, Allianz Trade upgraded 21 country risk ratings (+13 vs 2022) – including South Africa – and downgraded only four (-13 vs 2022).
For South Africa, that meant an overall upgrade to a B3 rating – sensitive risk for enterprises, with “B” referring to the country’s medium-term rating (country grade) and the “3” to its short-term rating (country risk level).
The first measures economic imbalances (economic risk), the quality of the business climate (business environment risk) and the likelihood of political hazards (political risk).
The latter identifies more immediate threats by focusing on the direction of economic output in the next 6 to 12 months and those macroeconomic indicators that can signal imminent financial crisis as a result of a disruption to financing flows.
The short-term rating is the combination of two indicators: the Financing Flows Indicator (financing risk) – a measure of short-term financing risks for an economy that can impact payments of trade receivables between companies – and the Commercial Risk Indicator (commercial risk), which measures the short-term disruptions in demand. It includes Allianz’s macroeconomic and insolvency forecasts.
While financing risk was found to be at medium risk, followed by economic, business, and political at sensitive, commercial risk was measured to be high.
Global outlook
Overall, when looking at the average of all of Allianz Trade’s country risk ratings, the global risk of non-payment for companies in 2023 stands slightly above 2 (medium risk), stable compared to 2022 and almost back to the level in 2019.
Regionally, Africa’s average risk rating stands above 3 (sensitive), while the Middle East, Latin America, and Eastern Europe (including Russia) are close to but below 3 (sensitive). Asia Pacific is slightly above 2 (medium), and Western Europe and North America are close to 1 (low).
Boata says Africa remains the continent with the greatest difficulties in terms of liquidity and access to international markets at a time when liquidity risk is increasing almost everywhere. “Against this backdrop, the current cycle and enduring fiscal and monetary policy efforts may trigger further upgrades in the Americas, with Africa and the Middle East most likely to fall behind,” she adds.
Strengths
Economic resilience remained a feature of South Africa in 2023 “despite business interruptions, increased inequality caused by loadshedding, poor infrastructure, and a modest employment rate, which remains slightly above 40%”, the report read.
According to the report’s findings, South Africa exhibited positive economic performance last year, with “declining trends in insolvencies and reduced external vulnerabilities”.
From a tourism perspective and its contribution to the GDP, overseas visitors increased by 47% year on year to 1.9 million between January and November 2023, while African visitors increased by 53% to 5.8 million, the report said, adding that private consumption and services also remained supportive.
Touching on the country’s budget deficit, the report said this presented a positive surprise, “with fiscal consolidation efforts, disciplined salary increases and increased tax collection contributing to stabilisation of the government debt ratio at slightly over 70% of GDP”.
There is even a modest GDP growth in the air for South Africa this year (+1.4%).
“After an expected +0.7% in 2023, in line with our forecasts, output in the energy-intensive mining sector and manufacturing is likely to resume close to pre-pandemic levels thanks to an increased availability of electricity, some electoral spending, tourist inflows, and resilient internal demand,” the report read.
Inflation remains under control since the peak of 8% in early 2023 and is likely to return to a 4% average in 2024, with the central bank “taking a dovish approach in Q2”.
Other positives mentioned included “abundant international reserves ($61 billion in September, about 15% of GDP) covering around six months of imports, a flexible exchange rate and limited external debt in foreign currency”.
“Although the country’s dependence on foreign capital makes it susceptible to sudden stops due to international relations, such as the alleged sale of weapons to Russia or the recent stance against Israel for the treatment of Palestinians, the external balance has so far been resilient to shocks,” the report said.
Foreign debt to GDP now stands at less than 40%, down from 53% and 56% in 2019 and 2020, respectively.
Weaknesses
Unsurprisingly, the report found that the “lack of reliable electricity supply poses a significant drag on growth, hindering businesses, industry, and households from realising their full potential”.
“While labour unions are likely to mobilise strikes in opposition to loosening local content rules for new generation capacity, it is improbable that sufficient capacity will materialise in the next 12 months,” the report said.
Despite fiscal improvements, the report found that South Africa ranks poorly in public debt sustainability risk due to a considerable short-term absorption of revenues for debt repayment and elevated sovereign bond yields.
The latter refers to the situation where the interest rates on government bonds are relatively high compared to historical averages or compared to the yields of bonds issued by other governments. Sovereign bonds are debt securities issued by governments to borrow money from investors. The yield on these bonds represents the interest rate that the government promises to pay to the bondholder.
“Due to a considerable short-term absorption of revenues to repay interest on debt and an increase in sovereign bond yields, South Africa ranks in the worst quintile in our public debt sustainability risk assessment as of end-2023,” the report read.
But it is not all bad. The report forecasted that the primary balance in 2024 is expected to remain within -1% of GDP (-0.6%), with personal income tax (PIT), corporate income tax, local and import value-added tax (VAT), as well as import customs duties as primary contributors to revenue growth.
“Salary increases and bonuses led to larger PIT inflows and recent inflation bolstered VAT revenue streams. However, interest expenditure on debt will account for 4.5 to 5% of GDP.”
The export market, however, is not showing enough growth, according to the report. Then there is also South Africa’s slow-growing export markets. Together with volatile export markets, it contributes to the country’s high import propensity of 28% of GDP. This affects the country’s external accounts negatively and puts pressure on the rand, the report found.
“The rand’s value is influenced by price discrepancies, commodity price fluctuations, the current account deficit, and the need to accumulate foreign reserves.
“Upside pressures include increased foreign investor interest in developing economies, a conservative central bank stance and upwardly moving commodity prices, which should buffer its longer-term depreciation trend,” the report read.
And then there is the upcoming 2024 national elections. It is anticipated that President Cyril Ramaphosa will disclose the date for the elections within 15 days after the State of the Nation Address, which took place on 8 February.
The report said that disputes among political elites have led to violent uprisings and insurgencies, impacting the institutional framework, state legitimacy and the predictability of government action.
“While social unrest and violent events are likely to intensify in the electoral period. The need to increase social spending before the general election and idiosyncrasies among public entities pose risks to the outlook,” the report said.
Potential downgrades in 2024
Looking ahead, several factors could challenge the “country risk” landscape, globally, leading to more downgrades in 2024.
Among the major risk factors identified by Allianz Trade for 2024 are:
- Liquidity constraints in an environment of high public and private debt and high interest rates.
- Below-potential growth in most regions and lower pricing power for corporates, which will drive revenue growth downwards.
- Rising business insolvencies (+8% globally in 2024), with Europe and the US leading the acceleration.
- Changes in global supply chains, which could take a toll on countries with twin deficits, mainly on current account balances.
- Increasingly polarised geopolitics in a packed election year, with economies accounting for 60% of global GDP heading to polls.
To download the full report, click here.
