Fitch Ratings has warned that SA’s electricity crisis could weigh on the country’s ratings if it is not properly addressed.
In a statement on Wednesday the agency said even though SA still had room to absorb the temporary economic losses from electricity supply shortages at its current rating of BB-, the problem could weigh on ratings if the problems are not addressed over the medium term.
Warning that the declaration of a national state of disaster confirms the credit risks facing SA, Fitch said the problem with the issues in the electricity sector, particularly with Eskom, is that they were also a focus of the 2022 state of the nation address but the situation had continued to deteriorate.
Fitch’s statement comes after the short note on SA by Moody’s Investors Service last Friday, which stated that intensified bouts of load-shedding were a credit negative for the country.
Moody’s also said it expects the effect of blackouts on businesses, consumer sentiment and investment will weaken already subdued economic growth prospects and threaten social and political stability.
Fitch said the power crisis is the most acute aspect of SA’s economic difficulties.
In January, the Reserve Bank slashed its economic growth forecasts for 2023 to 0.3%, from 1.1% previously. It also revised its days of load-shedding estimates to 250 days of load-shedding in 2023, from 100 previously.
The Bank said the heightened load-shedding is now forecast to shave two percentage points off growth in 2023, from the 0.6 percentage points initially estimated in November.
It expects load-shedding to decline only in 2024 and 2025 but now forecasts 150 days of load-shedding in 2024, up from 40 days previously, and it assumes 100 days in 2025.
The agency said the state of disaster declared by President Cyril Ramaphosa during his address last Thursday and the appointment of a minister of electricity with responsibility for managing the crisis could strengthen the government’s capacity to co-ordinate a response. It could accelerate practical measures to address power shortages because it limits regulatory requirements.
But the agency warned that the generally poor track record on execution and Eskom’s governance problems suggests further delays are possible. SA’s low growth potential, which Fitch estimates at 1.2%, remains a big credit weakness.
Downside risks
Fitch said even though the deterioration of electricity supply is beyond its base case and presents downside risks to its GDP forecast from December of average 1.1% growth in 2023, SA’s better-than-expected 1.6% third-quarter economic growth was significantly higher than the 0.2% contraction it had forecast.
“This momentum should limit the size of downward revisions to our 2023 growth forecast during our next assessment, reflecting carry-over effects,” said the agency.
SA faces other big challenges, including growing problems at Transnet.
Fitch said that if infrastructure problems cause a further decline in potential growth, that could eventually weigh on the sovereign rating. “We stated in November a further weakening of trend growth or a sustained shock that further undermines fiscal consolidation efforts and raises socioeconomic pressures could result in negative rating action,” Fitch said.
However, the agency said the effect on deficits could be dampened by the recent strong revenue performance.
“Our last forecasts in December indicated that the consolidated fiscal deficit would stand at 5.1% of GDP in the fiscal year ending March 2023 and stay close to that level in the following two years,” Fitch said. “This compares with the government’s forecast that the deficit will decline to 3.9% of GDP in financial year 2024/2025, from 4.9% in 2022/2023, with the difference due to forecasting weaker government revenue and higher payroll spending.”
Chief economist at Old Mutual Investment Johann Els said Fitch’s warning only means it is closely watching the risks and is monitoring the situation.
“Yes, ratings agencies are worried that load-shedding will hurt growth, and when growth is too weak and not picking up that hurts the fiscus and in turn hurts the progress that we have had in fiscal consolidation, getting to a lower deficit and the stabilisation of the debt ratio,” Els told Business Day
He said there is a high chance that a downgrading will not materialise as there is a lot of action to get electricity online.
“One to three years from now the risk of load-shedding will be significantly less — not zero but less given all the private sector projects coming online and the significant efforts from government,” he said.
Update: February 16 2023
This article has been updated with comment.
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