'Eskom a major source of fiscal and general macroeconomic risk'
Absa said yesterday that Eskom’s elevation of load shedding to Stage 6 in December had left the country vulnerable to the downgrade, which would trigger a massive instability in the financial markets and raise the cost of borrowing.
Absa said during the presentation of its quarterly perspectives that the developments have left the country’s fiscal position precarious with a rising public debt.
Absa’s corporate and investment banking economist, Miyelani Maluleke, said the severe electricity constraints in December were likely to cause further weakness on the production side of the economy.
Maluleke said Eskom continued to be a major source of fiscal and general macroeconomic risk.
“The unbundling programme laid out in the discussion paper last year on its own cannot fix the electricity sector’s challenges and the pushback against reforms at Eskom is intense. Load shedding is likely to continue and Eskom may need even more bailout money than that already allocated by the government,” he said.
“However, the demand side of the economy will provide an offset to the production side weakness, thanks in part to the ‘Black Friday’ effect, which we believe is not fully accounted for in StatsSA’s seasonal adjustment framework.”
In November, the statistics agency said that the country’s gross domestic product (GDP) decreased by 0.6percent in the third quarter of 2019, following its rebound in the second quarter.
While growth in the fourth quarter was expected to have picked up, the highest stage of load shedding ever seemed to have dampened any optimism that the economy would tick up.
“Overall, we expect the fourth quarter 2019 GDP data to reflect a small rebound of 0.4percent quarter-on-quarter, helping South Africa to avoid slipping into its second recession in as many years,” Maluleke said.
Absa warned that the country would be downgraded if Finance Minister Tito Mboweni failed to inspire confidence with his Budget Speech next month. Mboweni has faced headwinds from the ANC and its allies over his growth plan that he released in August. He has continuously voiced his frustration over the country’s slow pace of economic reforms.
Strategist at Absa Capital, Mike Keenan, said ratings agencies were monitoring SA’s weak growth, slow structural reform, electricity shortages and large fiscal deficits.
“We believe the risk of downgrades in 2020 remains high,” Keenan said.
“We are inclined to view Moody’s as more likely than not to act on March 27, absent a better-than-expected stance in the 2020 Budget or an unlikely pick-up in growth momentum, but we think this is probably largely priced into markets already.”
Keenan said South Africa needed to run sizeable primary budget surpluses just to stabilise debt-to-GDP.
“We believe the government intends to implement some corrective measures in the 2020 Budget, which will be unveiled on February 26, but their scale and exact modalities are still up in the air, especially with regard to the relative balance between reliance on expenditure cuts versus tax increases,” he said.