Fitch Ratings on Monday affirmed SA’s long-term foreign and local currency debt ratings at ‘BB-’ and maintained its stable outlook but warned further big increases in the government’s debt-to-GDP ratio due to persistent large fiscal deficits, as well as weakening economic growth, could lead to a downgrade.
At BB- SA remains three steps below investment grade.
In its commentary, the US-based ratings agency said SA’s rating is constrained by low real GDP growth hampered by power shortages, high level of inequality, a high government debt-to-GDP ratio, and a modest path of fiscal consolidation.
“We forecast zero real GDP growth in 2023, against 1.9% growth in 2022, due to severe power shortages in recent months that are likely to weigh heavily on GDP,” Fitch said. “This should be followed by a modest recovery to 0.9% growth in 2024 and 1.3% in 2025.”
The agency said strong investment in power generation after the deregulation of the sector should moderately improve energy supply from 2024 and support the recovery, however it warned that real GDP growth will remain constrained by a poorly functioning transportation sector that drags on exports.
Regarding Eskom’s debt transfer, Fitch said it believes Eskom will meet all the conditions for the advances to be converted into equity. This follows guarantees by the SA government to rescue Eskom, the state-owned power utility, from financial trouble by providing advances of R78bn in the fiscal year ending March 2024, R66bn in financial year 2025 and R40bn in 2026, when it will also directly take over R70bn of Eskom’s loan portfolio.
The debt transfer, which Fitch incorporated into its debt forecast as a stock flow adjustment, will increase SA’s consolidated debt-to-GDP ratio by about 3 percentage points, the ratings agency said.
Fitch said it also expects SA’s consolidated fiscal deficit to widen to 4.5% of GDP in 2024, from 4.2% in this year, against a government forecast of 4%.
“We anticipate weaker revenue growth due to the lack of real GDP growth and additional spending after a public-service wage agreement that will only be partially offset by savings elsewhere,” Fitch said, and added that it expects the consolidated budget deficit to stabilise at 4.6% of GDP in financial year 2025 and moderately narrow to 4.2% in 2026 supported by higher revenue growth.
With regards to rising government debt, Fitch said it expects gross loan debt to reach 76.9% of GDP in 2026, up from 72.3% at in 2023, against a government forecast of 73.6%.
This is well above the end-2022 ‘BB’ median of 56.2% of GDP, Fitch said and added that the debt structure remains favourable, with long maturities of over 11 years for total debt and a low share of foreign-currency denominated debt.
The agency said it expects SA inflation to remain above the Reserve Bank’s 4.5% target in 2023, at 6.4% on average. It said this is due to the continued depreciation of the rand of about 15% against the US dollar and the cost of load-shedding for businesses, which is likely to be passed on to consumers.
“We forecast inflation to decline to 5.5% in 2024 and 4.5% in 2025, respectively, enabling the Reserve Bank to start easing monetary policy,” Fitch said.
Fitch warned that it anticipates SA’s current account deficit will widen further to 2.4% of GDP in 2023, 3.6% in 2024 and 3.5% in 2025, from 0.4% in 2022, mainly as a result of low global demand, logistic sector difficulties constraining export volume and rising imports driven by a fixed-capital formation recovery.
The ratings agency also marked elevated sociopolitical risk as a core concern ahead of May 2024 general election.
Fitch said it believes SA’s very high unemployment rate, which stands at 32.9% and the country’s exceptionally high level of income inequality will continue to constrain fiscal consolidation and pose a risk to sociopolitical stability, with frequent strikes and protests.
“The ANC’s dominance over the political landscape has been challenged since the party’s poor performance in the November 2021 municipal elections,” Fitch said. “We believe the party could lose its majority in the May 2024 general election, but this would be unlikely to result in major changes in economic policy.”
In response to the ratings outcome, the National Treasury said the SA government is implementing urgent measures to reduce load-shedding in the short term and transform the sector through market reforms to achieve long-term energy security.
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