Fitch fear over SA fiscal policy
Latest financial support will not have a negative impact on the country’s credit rating
FITCH ratings on Friday said the government’s latest financial support would not have a negative impact on the country’s credit rating. This as the rating agency said it would keep a keen eye on South Africa’s fiscal policy decisions in the lead-up to May’s elections.
Jan Friederich, a senior director for sovereigns at Fitch, said the government’s R69 billion financial support over the next three years had only a “limited effect on the country’s sovereign risk profile, as large contingent liabilities are already partly reflected in the sovereign rating.” However, Friederich said the government had to rein-in its ballooning debt.
“Sizeable government debt and contingent liabilities are important sovereign rating weaknesses for South Africa, and a failure to stabilise the debt to gross domestic product (GDP) ratio over the medium term is one of our negative rating sensitivities,” Friederich said.
“The evolution of fiscal policy in the run-up to, and beyond, May’s general elections will remain an important element of our ratings assessment.”
Fitch, however, said the country’s ratings were supported by a favourable government debt structure, a healthy banking sector, deep local markets and strong institutions.
National Treasury’s 2019 Budget Review document showed that South Africa’s gross national debt will increase to 60.2 percent of GDP by 2023/24, from 55.6 percent in 2018/2019.
Fitch and S&P Global Ratings both have South Africa’s sovereign at sub-investment grade, while Moody’s has the country’s rating at investment grade.
Moody’s has called for further detail on how the break-up of Eskom into three entities responsible for transmission, generation and distribution will operate financially in the medium term.
Moody’s further warned that Eskom will remain the main source of contingent liability risks, weighing on South Africa’s fiscal strength.
FNB chief economist Mamello Matikinca-Ngwenya said the way out of South Africa’s fiscal troubles was to implement structural reforms, including the successful implementation of Eskom’s proposed turnaround strategy.
“The damage inflicted by years of persistent weak economic growth has left the government in an unenviable position. Its debt load has swollen so much that the interest bill now consumes a projected R210bn of tax revenue in 2019/20,” Matikinca-Ngwenya said.
“This is already R35bn more than the state’s planned capex budget over the same period.”
Moody’s was expected to give its decision on South Africa’s sovereign rating next month.
Peter Attard Montalto, the head of capital markets research at Intellidex, said the entire plan needed to be laid out in one place, in a white paper, including National Treasury conditionality on the bailout.
“National Treasury removing the bailout in future would likely cause the instantaneous loss of confidence in Eskom and the political pressures would make doing so almost impossible. Instead, making the conditionality public would allow investors, banks and ratings agencies to police this conditionality,” Montalto said.
Intellidex further said that on balance it was of the view that last week’s Budget did mean a downgrade of the Moody’s outlook was still very much likely on March 29.