The myriad problems facing South Africa’s economy compounded on Friday after Fitch Ratings revised the outlook on the country’s sovereign debt downwards from stable to negative, a move that usually precedes a rating downgrade.
The rating agency flagged the government’s continuous bailouts of embattled state-owned entities (SOEs), low growth and revenue under collection as presenting significant risks to the fiscus. Fitch in a statement said the R59 billion bailout for Eskom in the next two years would see government debt worsen. “Fiscal metrics have deteriorated significantly due to under-performance of revenue, which is expected to worsen in the current fiscal year as growth has turned out to be weaker than expected,” Fitch added. “The outlook revision reflects a marked widening in the budget deficit as a result of lower GDP (gross domestic product) growth and increased spending, including state-owned enterprise support, increasing our projections for government debt/GDP and heightening the difficulty of stabilising debt/ GDP over the medium term.”
The latest financial support for the embattled power producer means the government would have coughed up R49bn in the 2019/20 financial year, R56bn in the 2020/21 period and R23bn in 2022 financial year, with at least another R100bn in the pipeline in the coming years. SA Airways, the SA Broadcasting Corporation and arms manufacturer Denel were also in line for multibillion-rand bailouts. The New York-based rating agency also said it expected the consolidated “general government (GG)” deficit to widen to 6.3 percent of GDP in the current financial year.
The National Treasury in the February budget had forecast a deficit of 4.5 percent in the 2019/20 period. The Treasury in a statement said the government was working around the clock to ensure SOEs become financially stable. “The government is aware of the strain and risk that SOEs, particularly Eskom, present to the fiscal framework. “The government is urgently working on stabilising Eskom while developing a broad strategy for its future,” the Treasury said. “Additionally, the government will have to make tough decisions in order to reverse the country’s debt trajectory and improve economic growth prospects.”
Fitch and S&P Global Ratings in 2017 downgraded South Africa’s ratings to non-investment grade with Moody’s the only big rating agency that still has the country at investment grade. Investec economist Kamila Kaplan said: “The deterioration in economic performance, revenue shortfalls, the sizeable wage bill and budget support for state-owned enterprises (especially Eskom) have impacted negatively on fiscal metrics,” Kaplan said. “As such, South Africa remains vulnerable to a sovereign credit rating downgrade by Moody’s to non-investment grade.”
Moody’s last week slammed the government’s R59bn support for Eskom over the next two years in the absence of a plan to stabilise it. Ugras Ulku, of the Institute of International Finance, said spending overruns caused by the front-loading of support for Eskom would contribute to widening fiscal deficit from 4.3 percent of GDP in 2018/19 to 6.3 percent in 2019/20 and 6.2 percent in 2020/2.
“We project as a result that government debt will increase to nearly 61 percent of GDP in 2020/21, as opposed to the government’s projection of 57.4 percent of GDP. “With the government unlikely to be able to introduce meaningful corrective measures to stop the deterioration in the fiscal deficit and public debt ahead of the next Moody’s rating review scheduled for November 1, the risk of a credit-rating downgrade… has risen."