Signals are growing that SA is losing the battle to hold on to its investment-grade credit rating as public finances spin out of control and a top Treasury official warns "the box is empty".
Fitch Ratings cut its outlook on SA’s debt to negative on Friday following the announcement of an additional R59bn in support for Eskom. Moody’s Investors Service hinted strongly earlier in the week that it could no longer remain silent on SA’s deteriorating debt picture.
Following the two reports the rand slid from a best level of R13.8291/$ on Monday to Friday’s worst at R14.3163/$, a fall of about 3.5% to a level last reached about a month ago.
The latest developments could push Moody’s to place SA on negative watch in November and perhaps downgrade it to subinvestment grade by February 2020, if not sooner.
Should it downgrade SA to junk status, the country will fall out of global bond indices, which are tracked by global investment funds, prompting automatic selling of local debt instruments.
On Friday, Fitch said the negative outlook was due to a "marked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise support".
Additional support for embattled power utility Eskom would widen the budget deficit for this fiscal year to 6.3% of GDP compared with the 4.5% of GDP the government projected in February, the agency said.
This is worse than Moody’s projections of the fiscal deficit widening to 5.7% of GDP.
Fitch said plans to restructure Eskom would be challenging, given opposition from trade unions "fearing privatisation and job losses".
Treasury director-general Dondo Mogajane told Business Day on Sunday that the government would need to make difficult decisions about where to cut spending. A measure equivalent to cutting the salaries of all government employees by 10% is what would be required to fund the bailout of failing state-owned enterprises (SOEs).
But this is not a likely scenario as labour would not agree to this kind of measure, he said.
"Realistically, it’s not something we can approve and it’s not really possible, but there are no holy cows and we have to make some tough decisions. We need to avoid a situation where everything collapses."
He said that while he would likely find himself at loggerheads with labour, they need to consider how tough the situation is.
"Eskom has to be supported. If it isn’t, it will collapse, which will be detrimental to the economy. The impact of tax increases versus cutting expenditure has to be weighed against each other."
Mogajane said the Treasury’s "box is empty" in that the debt-to-GDP ratio is unsustainable, tax revenue low and the economy barely growing.
"The fiscal parameters have continued to deteriorate, including a looming large revenue shortfall as well as further funding needed to support the failing SOEs," Stanlib chief economist Kevin Lings said.
"It is also clear that Moody’s will share many of the same concerns highlighted by Fitch," Lings said.
Fitch downgraded SA to junk in April 2017 after former president Jacob Zuma fired then finance minister Pravin Gordhan. The S&P Global Ratings assessment is two steps below investment grade with a stable outlook.
A failure to stabilise the debt-to-GDP ratio over the medium term, a further deterioration in SA’s trend GDP growth rate or increased vulnerability resulting from a current account deficit and the need for external financing would lead to a downgrade, Fitch warned.
Moody’s is expected to change its outlook to negative in November but could hold off on a downgrade until 2020, Lings said.
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