Ratings agency Fitch sees the government coughing up R50bn in cash for Transnet over the next two fiscal years, with the public debt rising much more steeply than the government projects — but it has affirmed SA’s rating and its stable outlook, indicating it has no plans to change the rating any time soon.
Like rival S&P Global Ratings, Fitch has SA’s rating on BB- (double B minus), which is three notches below investment grade, and one notch below Moody’s Investors Service.
On Friday, Fitch affirmed the rating and the outlook, but warned that a further significant increase in the government’s debt-to-GDP ratio, or a further weakening of the economic growth trend, could prompt a downgrade, as could a “sustained shock that further undermines fiscal consolidation efforts and raises socioeconomic pressure in the face of exceptional inequality”.
Conversely, it said, the rating could be upgraded on confidence that the public debt would stabilise or on stronger medium-term growth prospects. While Fitch said it believed the ANC could lose its majority in the 2024 general election, “this would be unlikely to result in major changes in economic policy”.
Fitch sees government debt reaching 83.2% of GDP in the next fiscal year that ends in March 2026, up from 76% in the current year. Fitch’s projection, which is similar to S&P’s, is significantly worse than the picture painted in finance minister Enoch Godongwana’s October medium-term budget, which saw debt peaking at under 78% in 2025/26.
The ratings agency is also somewhat more bearish than the market on economic growth, which it forecasts at 0.9% in 2024 and 1.3% in 2025, up from 0.5% in 2023, but its forecasts are no worse than they were at the time of its last ratings update in July.
The update from Fitch on Friday comes ahead of the main budget, which Godongwana is due to present in parliament on February 21. Economists are waiting to see whether he will firm up details of the ambitious medium-term spending cuts he announced last year, as well as the R15bn of tax hikes he pencilled in, and it is expected growth and revenue forecasts could come in slightly worse than October’s numbers, which were already revised down.
Fitch warned SA’s public debt level was much higher than the 52.2% median for SA’s peer countries in the BB ratings band. The ratings agency said it had assumed R50bn of below-the-line support to Transnet, in the form of capital injections or a debt transfer, split between 2024/25 and 2025/26. This was “likely, given the importance of Transnet in the SA economy”, with Transnet due to announce its five-year strategic plan by March. In December, the government provided Transnet with a R47bn guarantee facility (0.7% of GDP) to support its recovery and help it meet immediate debt repayment obligations.
The ratings agency’s scepticism about the government’s ability to deliver on its promise to stabilise the public debt is shared by many in the market. It is a key reason investors keep the cost of government’s long-term borrowing so high — reflected in yields of over 12% on the government’s 20-year bonds. That, in turn, is one of the factors expected to drive up the stock of debt, along with SA’s weak currency, which increases the stock of foreign debt in rand terms, and the Transnet bailout.
But the biggest driver of the increase in debt is the government’s ballooning fiscal deficits, which Fitch sees widening to 4.7% in 2023/24 and 4.8% the following year, from 3.7% in 2022/23. Tax collections will be hampered by low GDP growth and low corporate profitability, while spending will increase because of the public sector pay agreement and higher interest payments. Fitch expects the government’s interest bill to increase gradually to 20.9% of its revenue in 2024/25.
It expects too that SA’s high unemployment and exceptionally high income inequality “will continue to constrain fiscal consolidation and pose a risk to sociopolitical stability, with frequent strikes and protests”.
However, Fitch’s rating gives SA credit for its favourable debt structure with long maturities and mostly local currency debt, as well as its strong institutions and credible monetary policy framework. It also cites SA’s track record of more than 20 years without a restructuring of public debt.
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