S&P warns SA over its R500bn coronavirus stimulus package

FILE PHOTO: The S&P Global logo is displayed on its offices in the financial district in New York City

FILE PHOTO: The S&P Global logo is displayed on its offices in the financial district in New York City

Published May 25, 2020

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JOHANNESBURG - S&P Global Ratings has warned that South Africa’s R500 billion coronavirus stimulus package could widen the country’s debt burden to unsustainable levels and weaken an already depressed economy.

The ratings agency on Friday maintained its negative sovereign credit rating for South Africa at sub-investment grade with a stable outlook, citing a weak fiscal position, contingent liabilities and the multibillion-rand economic recovery package.

S&P assessed South Africa’s long-term foreign-currency rating at BB-, three notches below investment grade, with a stable outlook.

S&P analysts led by London-based Ravi Bhatia said in a report that South Africa’s fiscal deficit could widen to an all-time high of 13.3 percent of gross domestic product (GDP) this year.

In February, Finance Minister Tito Mboweni forecast that the consolidated Budget deficit would widen to 6.8 percent of GDP this year, or R370bn. “South Africa’s fiscal position remains weak, and a Covid-related shrinking economy, lower government revenues, and a large fiscal package have further exacerbated existing fiscal problems,” S&P said.

The agency slashed South Africa’s debt further into junk territory at the end of April in an out-of-schedule downgrade that took the country to the lowest rating yet.

S&P on Friday said the economy would contract by 4.5 percent this year due to lockdown restrictions, weak external demand conditions and tighter credit conditions.

This would be below the 7 percent GDP contraction forecast by the SA Reserve Bank last week, as the economy was already in a technical recession before the Covid-19 impact.

State-owned enterprises have been a key source of the government’s spending pressure, with the February Budget allocating R67bn towards them for 2020.

The government will set aside at least R10bn further to rescue cash-strapped SA Airways while also providing financial support to the Land and Agricultural Development Bank after it defaulted on its domestic bond notes totalling about R50bn.

Mboweni will next month table an adjustment budget, which will account for the impact of the Covid-19 on the fiscus.

Mboweni will also detail funding plans for the stimulus package, outline a range of economic reform proposals and measures to stabilise public finances. The economic recovery package consists of R130bn reprioritised from the February budget, R200bn of loan guarantees, and tax relief and deferral measures worth R70bn.

A further R130bn would be borrowed from international financial institutions, over and above R230bn of additional spending on health care and municipalities.

The government has defended its R500bn fiscal support package, with the National Treasury, saying that the package, alongside the monetary policy response, would provide substantial support to the economy.

“Government has acted decisively to prioritise the health and lives of all South Africans. It has now adopted a risk-adjusted approach to reopening the economy, with the initial easing of lockdown measures on May 1, 2020, and further easing expected from June 1, 2020,” the Treasury said.

The Treasury late on Friday said S&P’s stable outlook reflected the balance between pressures related to very low GDP growth and high fiscal deficits against the country’s deep financial markets and monetary flexibility.

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