Fitch Ratings has warned that in affirming SA's credit rating at BB- it has not factored into its debt forecast the additional R150bn capital injection that Eskom will need from the government.
The ratings agency maintained SA’s long-term foreign currency issuer default rating at BB- with a stable outlook, citing an improvement in the current account balance as the commodity super-cycle boosted the fiscus.
Fitch, however, expressed doubt over the government's ability to stabilise debt. It forecasts a jump in government debt to 75.9% of GDP in 2024/25 from 68.7% in the 2021/22 financial year. It said contingent liabilities, mostly related to debt of non-financial public, financial public enterprises and IPPs was not exceptionally high, “but the poor finances of many enterprises mean they pose considerable risks to public finances”.
“Eskom is expected to require additional financial support of around R150bn, which is not factored into our debt forecast due to the uncertain timing and form of support.”
Fitch said electricity shortages weighed heavily on growth and this could worsen further before new supply, mostly in the form of independent power producer (IPP) projects, comes on line.
“While the government is making progress with its reform agenda, the scale of measures beyond electricity is too limited to make a significant difference to potential growth in the medium term,” it said.
Fitch expects the economy to decelerate to 2.3% growth in 2022 and further to 1.7% in 2024 after recording growth of 4.9% in 2021. It said domestic growth was still supported by post-pandemic normalisation and high prices for SA's key commodities, but these factors will fade gradually as the international environment becomes more challenging.
Eskom, whose debt is around R380bn, last week rolled out stage 6 power cuts for the first time since 2019, citing the need to safeguard its power plants due to an illegal wage strike.
Commenting on the latest rating, Nedbank economist Isaac Matshego said Fitch's forecast of the public debt was in line with market expectations given that S&P Global Ratings revised SA’s credit rating outlook to positive from stable and Moody ’s Investors Service changed its outlook on the country’s rating to stable from negative.
Matshego said Eskom was a key risk to public debt. “Eskom’s financial troubles are worsening. It is clear the government will have to increase the size of its financial assistance to Eskom and that will worsen the debt trajectory.”
The Eskom CEO and public enterprises minister have completely failed South Africa to [provide] households, businesses and investors with energy security, and that needs President Cyril Ramaphosa to take a decision in recalling both candidates from those responsibilities and field capable human capital from the pool the country has
Last week, the International Monetary Fund said solutions to Eskom’s debt problem required the downsizing of the company’s balance sheet and the restoration of its commercial viability.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory, said Eskom needed leadership, a board of directors, and a CEO that understands the challenges of the power utility to design a plan that can be implemented as phases of small wins. He believes the additional financial support of around R150bn will have to be deployed to the entity when there is a clear, active operational strategy to be executed.
“The Eskom CEO and public enterprises minister have completely failed South Africa to [provide] households, businesses and investors with energy security, and that needs President Cyril Ramaphosa to take a decision in recalling both candidates from those responsibilities and field capable human capital from the pool the country has,” Mkhabela said.
He added that the South African government debt neared 100% of the National Treasury’s forecast for the fiscal year through March 2022, heightening the risk that liabilities may overshoot official estimates.
He said that in the last quarter of 2021, the National Treasury revised its debt projection for the current fiscal year to R4.31-trillion, or 69.9% of GDP, and the government debt crisis had worsened.
“Generally, government debt as a percent of GDP is used by investors to measure a country's ability to make future payments on its debt, thus affecting the country's borrowing costs and government bond yields. We are living in times of continuous economic and environmental crisis,” Mkhabela said.
