The likelihood of a credit downgrade to junk status for South Africa by June has diminished to below 50%, although political tension and the low-growth trap worry S&P Global Ratings.
Speaking on the sidelines of the S&P credit conference in Johannesburg on Tuesday, S&P associate director Gardner Rusike said that theprobability was a one-in-three chance of a ratings downgrade. But he said the rating could be lowered should the agency not "see improved economic growth [and] if we see that the contingent liabilities are rising".
Contingent liabilities are provisions for unexpected future events.
The National Treasury's failure to meet fiscal consolidation targets, which include reducing public spending and cutting costs to stabilise debt, would impact the rating adversely. Loss of an investment credit rating is negative for borrowing costs, investment inflows and the currency, and will lead to higher inflation and interest rates.
S&P ranks the government's debt one notch above subinvestment, or junk, grade at BBB- with a negative outlook. Fitch Ratings has a similar rating while Moody's ranks South Africa two notches above junk. S&P's review is expected in June while Moody's has scheduled April 7 for its release.
Rusike flagged state-owned companies with weak balance sheets as risks to the sovereign balance sheet, particularly Eskom, cashing in on government guarantees at a faster pace than the Treasury had expected. The energy regulator has also curbed the rate of increase in electricity tariffs, adding further pressure on Eskom's revenue.
Delivering the budget last month, Finance Minister Pravin Gordhan said support for state-owned entities would be "deficit neutral".
But Rusike, commenting on state-owned enterprises, said: "The point is, options that harm the balance sheet of the government or make the public finances unstable could impact on the rating."
Political tension in the build-up to the ANC's elective conference in December and the national elections in 2019 was also being monitored.
"If we see increasing political tensions and infighting, which can derail the government's plan of boosting economic growth, then that will impact on our forecast and the way we view institutions in executing their mandate."
Jean-Michel Six, chief European economist at S&P, said that of concern was that South Africa's growth performance had lagged its peers such as India with a comparable GDP-per-capita ratio.
Deputy Finance Minister Mcebisi Jonas, speaking at the Gordon Institute of Business Science on Tuesday, said South Africa had not "sufficiently prioritised economic growth. I am extremely concerned we are not seeing the levels of investment in fixed capital we require to grow."
But he also said that discussions on growth had to include thought on "sweeping reforms" and the challenges that the state monopoly posed in sectors such as energy.
At a local government level, the discussion had to include eliminating red tape in permits and zoning.
Rusike said implementing policies and reforms concerning labour, the mining sector and the broader economy in collaboration with business and labour would improve the country's medium- to long-term potential growth.
Improved growth would lift profits in the business sector and help to narrow the current account deficit. South Africa has been running current account deficits since the 2009 recession. It has dipped since then from around 6% of GDP to 4% of GDP.
Rusike said that to begin paring back the debt-to-GDP ratio of more than 50% the country would have to narrow the current account deficit to below 3% of GDP.
S&P's growth forecast is around 1.4% for this year.
Rusike said that with weak growth the Treasury would have to implement faster fiscal consolidation to narrow the current account deficit.