Moody’s flags SA’s funding as a drag that won’t come down soon
JOHANNESBURG - INTERNATIONAL ratings agency Moody’s yesterday flagged South Africa’s higher funding costs and debt burdens as drags that would not come down in the foreseeable future as revenue generation capacity remained weak.
In its 2021 outlook for Sub-Saharan Africa sovereign countries, Moody’s said South Africa’s contingent liabilities from state-owned entities posed additional risk to already sizeable debt burdens.
It said South Africa’s revenue generation capacity would remain weak due to sluggish and ongoing consumer and business stress related to the negative effects of the Covid-19 pandemic on the broader economy.
The SA Revenue Service collected a net amount of R1 355.8 billion against a revised estimate of R1 358.9bn in the 2019/20 financial year, resulting in a shortfall of R3.1bn.
“We do not expect debt burdens to come down in the foreseeable future as revenue generation capacity remains weak,” Moody’s said.
“Higher debt loads, lower government revenue and higher interest costs will increasingly challenge debt affordability.”
South Africa’s debt is forecast to peak at 93 percent of gross domestic product (GDP) in 2023/24 when the country will be spending almost 6 percent of GDP on debt service costs.
The government is borrowing at a rate of R2.1bn a day and debt servicing costs are among the government’s top four expenditure items at R3.4bn.
Moody’s said government debt-toGDP would rise to 110 percent by the end of 2024 fiscal year.
Though South Africa fell deeper into sub-investment territory last year following two negative downgrades,
Moody’s maintained its GDP growth forecast for South Africa’s this year, with favourable gold prices likely to be supporting the current account balance.
“GDP growth of 4.5 percent in South Africa will support small economies that have strong ties to the country, such as eSwatini, which we forecast will grow by 1.4 percent,” it said.
Moody’s said that refinancing risks would also increase, as South Africa has large eurobond maturities in the next few years.
It said gross borrowing requirements and liquidity risk would remain elevated into the medium term, even as the economic recovery continues, due to increased eurobond maturities between 2024-25.
However, Moody’s said South Africa would be able to access deeper domestic markets, minimising liquidity risks in 2021 due to its large financial sector.
The government has committed itself to a fiscal consolidation programme, beginning by freezing salary increases for public sector employees over the next three years to save around R160bn.
Momentum Investments economist Sanisha Packrisamy said fiscal consolidation and debt stabilisation in the next five years relied on significant expenditure cuts and the earnest implementation of structural reforms.
Packrisamy said growth would recover to 2 percent in 2021, but high levels of unemployment, further expected corporate bankruptcies and ongoing loadshedding all pointed to the recovery being capped.
“Even with a fiscal consolidation plan in place that involves negative real wage increases for civil servants for the next three years, debt-service costs are set to rise from 12.9 percent of expenditure to 18.3 percent by 2023/24 financial year,” Packrisamy said.
“This makes the interest bill the fastest-growing expenditure item at nominal growth of 16.1 percent, or 11.7 percent in real terms, in the next three fiscal years.”