Fitch Ratings has slashed South Africa’s gross domestic product (GDP) growth forecast for 2023 to zero on the back of intensified power cuts while pointing to elevated socio-political risks due to the high unemployment rate.
This comes as it maintained that the country’s sovereign debt was below investment grade.
Fitch becomes the first ratings agency to firmly pronounce that South Africa’s economy will not grow at all this year, a significant climbdown from the 0.2% it forecast in March.
The ratings agency yesterday affirmed South Africa's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a stable outlook.
Fitch’s primary ratings analyst Thomas Garreau said South Africa's 'BB-' IDR was constrained by low real GDP growth hampered by power shortages, high levels of inequality, a high government debt-to-GDP ratio, and a modest path of fiscal consolidation.
However, Garreau said the ratings were supported by a favourable debt structure with long maturities and denominated mostly in local currency as well as a credible monetary policy framework.
“We forecast zero real GDP growth in 2023, against 1.9% growth in 2022, due to severe power shortages in recent months that are likely to weigh heavily on GDP.
“This should be followed by a modest recovery to 0.9% growth in 2024 and 1.3% in 2025. Strong investment in power generation after the deregulation of the sector should moderately improve energy supply from 2024 and support the recovery.
“However, real GDP growth will remain constrained by a poorly functioning transportation sector that drags on exports.”
Fitch noted that the implementation of structural reforms under the government's Operation Vulindlela initiative, launched in 2020, had accelerated.
“Nevertheless, the reforms are limited in ambition and we do not think they will significantly enhance South Africa's low growth potential,” Fitch said.
The ratings agency expects the country’s persistent and large consolidated fiscal deficit to widen to 4.5% of GDP in the 2024 financial year, from 4.2% in the 2023 financial year, against a government forecast of 4.0%.
“We anticipate weaker revenue growth due to the lack of real GDP growth and additional spending following a public-service wage agreement that will only be partially offset by savings elsewhere,” it said.
Fitch also said it expected inflation to remain above the South African Reserve Bank's 4.5% target in 2023, at 6.4% on average, due to the continued depreciation of the rand of about 15% against the US dollar and the cost of load shedding.
In response, National Treasury said the government had noted that the agency’s decision was supported by a favourable debt structure with long maturities and denominated mostly in local currency as well as a credible monetary policy framework.
“Government is implementing urgent measures to reduce load shedding in the short term and transform the sector through market reforms to achieve long-term energy security.”