The rating agency further flagged the risk of rising social tensions due to high inequality. The medium-term budget policy framework statement presented in October showed that South Africa’s fiscal buffers were depleted.
The latest National Treasury in October projected that gross debt was stabilising at 59.6percent of gross domestic product (GDP) by 2023/24 following numerous upward revisions.
Tumisho Grater, an economic strategist at Novare, said insight into the country's financial position will likely be revealed in the National Budget speech in February. “Debt servicing costs, contingent liabilities and the public wage bill all need to be met with limited resources. Credit rating agencies are also due to release their credit rating reviews,” Grater said.
“A close eye will also be kept on local politics in the lead-up and outcome of the general elections and what the outcome means for the country and the implementation of the much-needed growth-enhancing reforms.”
The government has struggled to rein-in guarantees to ailing state-owned entities as it attempts to maintain prudent levels of liabilities.
Eskom, South African Airways, the South African Post Office and Denel required multibillion-rand guarantees or recapitalisation during the 2017/18 financial year.
Elize Kruger, an analyst at NKC African Economics, said cash-burning state-owned companies were one of the main challenges facing the economy in 2019, and a credible solution must be found for them.
“In particular, Eskom, which is draining public funds and posing a risk for overall stability in the economy,” Kruger said. NKC African Economics now forecast real GDP growth of 1.7 percent and 2.2 percent for 2019 and 2020, respectively.
Intellidex analyst Peter Attard Montalto said the economy is still trapped between low potential growth on the upside and a robust private sector and demographics on the downside.
“We see unemployment higher and inequality rising too, while fiscal metrics flat-line in the primary deficit and the current account will marginally worse. We still think GDP per capita is the key metric to look at - where we see it showing no growth this year,” Montalto said.
Bank of America Merrill Lynch earlier this year said it expected Moody’s to downgrade South Africa’s rating this year. The bank said increasing debt levels and elevated financing needs of state-owned enterprises pose the main downside risk to the rating outlook.
“Under our current baseline, we expect South Africa’s public debt to breach 56percent of GDP and the budget deficit to reach 4.3 percent of GDP in 2019. In this scenario we would see room for a Moody’s downgrade to sub-IG in the next year,” the bank had warned.