Moody’s said the elevated government debt and liability risk from state-owned enterprises (SOEs) remained a risk to the country’s growth prospects.
It said the reduction of contingency liability reforms would exert upward pressure on the country’s overall rating, resulting in a downgrade.
The news saw credit spread in the market, moving up 18 basis points yesterday from a non-attractive 236 basis points to 217.
Economist Brian Kantor said the outlook put more pressure on Finance Minister Tito Mboweni’s medium-term Budget policy statement (MTBPS) next Wednesday.
“We will wait and see,” said Kantor. “Moody’s is particularly sympathetic to South Africa - more than other agencies.”
The appraisal came just hours after Eskom, the country’s biggest liability, confirmed another dim forecast for the current financial year, saying it was poised to record losses of R45 billion.
Moody’s said while Mboweni’s replacement of former minister Nhlanhla Nene a few weeks before the mini-Budget was received as positive, it still expect the country’s policy direction to remain the same, given the lack of changes in the past few years.
The agency said the government needed to improve corporate governance and liquidity problems in SOEs, Eskom in particular, with a standalone credit quality or Baseline Credit Assessment (BCA) of caa2 and guaranteed debt of about 7percent to contain liabilities risk.
It said the current BCA reflected the extremely weak liquidity for Eskom and a debt burden that was set to rise unless it was offset by tariff increases.
Wits Business School Economic Lecturer Johan Rossouw said the cash-guzzling SOEs remained the biggest threat to South Africa’s growth prospects.
“The government needs to rid itself of non-performing SOEs that really have no reason to exist. Non-performers like the SAA,” Rossouw said.
Moody’s said a potential upgrade would be determined by the country’s economic direction in the MTBPS.
“Successful implementation of structural reforms to raise potential growth as well as stabilise and eventually reduce the government’s debt burden, including through reforms to SOEs that reduce contingent liabilities, would exert upward pressure on South Africa’s ratings,” Moody’s said.
The agency projected the real economy to grow at 1.3 percent next year on the back of continued weak activity in most of the major industrial sectors.
The agency last month cut South Africa’s growth forecast from 1.5 percent expected at the start of the year to 0.7 percent on the news of South Africa entering a technical recession.
It said the rebound in the agricultural sector could, however, provide an upside potential for growth.
Investec Asset Management’s investment strategist, Michael Power, said Moody’s note indicated that there was hope for South Africa despite a constrained economy.