S&P lukewarm on SA’s debt targets
• Sovereign rating risks remain balanced, says agency • No reason to expect growth rebound
Just hours after the release of data showing SA’s economy has contracted in 2020 by the most on record, highlighting the challenges the country faces in stabilising its debt, S&P Global Ratings voiced scepticism that finance minister Tito Mboweni will meet his targets.
In the first feedback from the company on the February budget, it said on Tuesday that risks remain balanced in terms of the country’s sovereign rating. Mboweni last month said SA’s debt-to-GDP ratio will peak at 88.9% in 2023, a downward revision from estimates of 95.3% six months earlier. The lower debt consolidation trajectory was made possible by slightly higher GDP growth forecasts and much better than expected revenue collection over the fourth quarter of 2020.
Like Fitch Ratings, S&P has SA three notches below investment grade. S&P has the country on a stable outlook and Fitch on negative. The third big credit ratings agency, Moody’s Investors Services, has SA two notches into junk and on a negative outlook.
But, S&P said in a webinar on Tuesday that the Treasury’s fiscal framework is predicated on the improved trend in revenue collection continuing. In February, Mboweni announced that the SA Revenue Service (Sars) will collect more than R100bn more over the fiscal year than it had expected in October.
Stats SA said on Tuesday the full-year contraction of 7% was the biggest slump since official records began in 1946. Though it was marginally better than the 7.2% contraction forecast by the National Treasury in its 2021 Budget Review, the economy has a long way to get back to the levels just before the Covid-19 outbreak in 2020.
Director of sovereign and IPF ratings Ravi Bhatia said that S&P, which has not revised its fiscal projections since the budget and is still to adjust them in the next
cycle at the end of March, projects the debt-to-GDP ratio to rise to well beyond 90% in the forecast period up to 2023.
“The deficit and the debt trajectory [in the budget] hinged on positive news in the last quarter that revenue from mining and other sectors was higher than expected. The rebound in revenue has been extrapolated into the medium term … It is not clear if the recent uptick will translate into the medium term. It is not entirely clear if it will be sustained,” Bhatia said.
This was “recent good news”, he said. Of much bigger import and more impactful for SA’s fiscal outlook are its growth prospects, but there appears “no reason to expect a big sustained rebound in growth,” he added.
S&P projects growth for 2021 at 3.6% — mostly “a statistical rebound” — but averaging between 1% and 2% for the two years thereafter.
“It is a tight ship and we will have to watch where it goes,” Bhatia said.
Fitch and Moody’s made similar observations in their postbudget commentary, echoing concerns that the government might not find it possible to hold the line on the public wage bill. To meet the projections of the fiscal framework, public servants will be unable to receive a cost-of-living increase for the next three years. This is unprecedented as the wage bill has grown well above inflation since at least 2008.
As well as the risk posed by a higher than expected wage settlement, the ratings agency warned that the continued weakness of the financial position of state-owned enterprises remains a risk to the fiscal framework. Eskom, with debt of R488bn, is the largest concern.
S&P director of corporate ratings Omega Collocott said while there are some “bright spots” in the form of the restructuring of the electricity supply industry, she expects Eskom’s unbundling will be slowed by the pandemic and deadlines shifted, “in some cases by several years”. Eskom plans to establish a legally separate transmission company by end-2021 and two entities – generation and transmission – by end-2022.
Collocott said before the legal separation into three entities can take place the government will need to deal with the problem of Eskom’s debt.
“The separation doesn’t address Eskom’s financial stress or high leverage. The reality is it will be very difficult for a legal separation of Eskom, which would include allocating its debt to the various entities, to take place before that debt is reduced,” she said.
BEFORE THE LEGAL SEPARATION INTO THREE ENTITIES CAN TAKE PLACE THE GOVERNMENT WILL NEED TO DEAL WITH ESKOM’S DEBT