Lucie Villa, vice president at Moody’s, said the rating agency’s baseline scenario estimated that the debt-to-GDP ratio was projected to reach 65 percent of GDP by 2023.
However, Villa said risks to the debt trajectory stemmed from potentially larger state-owned entities (SOE) support packages than currently planned by the government as well as slower growth and higher interest rates.
“To illustrate these risks, we present a “weaker” scenario where debt would increase to 68 percent of GDP by 2023, versus 65 percent under our baseline. Under a more severe scenario based on Moody’s standardised shocks, debt would rise to 70 percent by 2023,” Villa said.
“South Africa’s credit profile would face downward pressure if we expect that government debt and contingent liabilities risk from SOEs will continue rising to levels no longer consistent with a Baa3 rating, or that medium-term growth will persist at very low levels as recorded in 2018.”
Villa said the economy would be in deep trouble, even under Moody’s baseline project of debt reaching 65 percent of GDP by fiscal year 2023.
Finance Minister Tito Mboweni has already warned legislators that if the government doesn’t do anything to rein in debt – in outer years the country will face a debt-to-GDP ratio at or about 60 percent of GDP.
“When that happens – we are very close to having serious conversations with the IMF,” he told legislators.
The National Treasury in February said that South Africa’s debt-to-GDP ratio would climb to 60 percent by 2021/22.
Moody’s said Eskom’s caa2 (very high credit risk) baseline credit assessment (BCA) makes it a particularly risky source of contingent liability, given that the BCA indicates a high default risk.
Villa said she believed that capital support to Eskom could be even larger than provisionally budgeted.
“Eskom’s financial profile remains very stretched and measures recently announced may prove insufficient to return the company to a sustainable financial footing, given that recently approved tariff increases, while of some benefit to the company, are still lower than those requested from the regulator.”
Eskom’s management last month said that it needs additional financial support above the annual R23 billion allocated for it after it fell R250bn short from what it expected to get in government support and the tariff increase announced by the energy regulator in March.
The Institute of International Finance associate economist Gregory Basile said investors were jittery regarding Eskom’s financial and operational challenges.
“On the fiscal policy front, potential further financial support for Eskom poses a major risk for the fiscal deficit targets and Moody’s sovereign credit rating decision,” Basile said.