S&P GLOBAL ratings agency yesterday warned about South Africa’s rising debt burden and substantial interest payments as risks to the country’s fiscal outlook.
In a presentation during a live webinar, S&P lead analyst Ravi Bhatia said the slow progress on the roll-out of Covid-19 vaccines and structural reforms would continue to hamper progress.
South Africa has inoculated less than 2 percent of the population against Covid-19 while new infections are on the rise in a number of provinces.
Bhatia said this would continue to constrain medium-term economic growth and limit the government’s ability to contain the debt-to-gross domestic product (GDP) ratio, in spite of South Africa’s near-term economic performance and current account experiencing a cyclical uplift.
South Africa’s gross loan debt is forecast to increase from R3.95 trillion in the current fiscal year to R5.2 trillion in 2023/24, stabilising at 88.9 percent of GDP in 2025/26.
Debt service costs are also expected to continue rising due to higher budget deficit, inflation and exchange rates, rising to R269.7 billion in 2021/22 and R916bn in the medium-term.
“South Africa’s public finances remain structurally weak, with high fiscal deficit, and a large debt burden, and sizeable contingent liabilities,” Bhatia said.
“Nevertheless, near-term fiscal deficits are declining slightly faster than previously forecast, owing to recent higher-than-expected revenue.”
S&P affirmed South Africa’s sovereign credit rating of BB negative, three notches below the investment grade, and kept a stable outlook.
Bhatia said the outlook on both the local and foreign currency ratings was stable since South Africa’s credit strengths should help counterbalance relatively low economic growth and fiscal pressure.
She said S&P could lower the ratings if South Africa’s economy fails to recover during the forecast period and fiscal financing or external pressures mount.
“This could, for example, arise from further financing risks emanating from contingent liabilities, including Eskom or tightening financing conditions increasing the government’s interest burden as a proportion of revenue,” Bhatia said.
Investec economist Lara Hodes said electricity supply constraints remained a downside risk to growth as there was no end in sight for frequent power cuts.
“Unreliable electricity supply remains one of the biggest downside risks to economic growth domestically,” Hodes said.
“It continues to hinder businesses, and especially smaller players already struggling to stay afloat after the devastating financial effects of the pandemic.
“Eskom’s debt remains elevated at R410bn and it continues to be a huge strain on the country’s fiscus and remains a key concern for credit rating agencies.”
But replying to his Budget vote speech in Parliament, President Cyril Ramaphosa said that the focus of his administration on economic reform was steadily but surely paying off.
Ramaphosa cited the booming rand, commodity prices, rising takehome salaries, low interest rates, growing exports and the first trade surplus in 18 years as examples of a rebound.
“We need to acknowledge that a number of important sectors, such as tourism, are still not fully operational and will take time to recover. At the same time, they are a cause for optimism.
“We are keenly aware that the pace of structural reform needs to speed up,” he said.