S&P affirms ratings, gives Eskom warning
Ratings agency S&P Global has warned that it could remove its positive outlook on SA’s sovereign rating if the planned debt relief for Eskom weakens the government’s debt trajectory without addressing the failings in the power utility’s operations and finances.
Ratings agency S&P Global has warned that it could remove its positive outlook on SA’s sovereign rating if the planned debt relief for Eskom weakens the government’s debt trajectory without addressing the failings in the power utility’s operations and finances.
In a ratings update on Friday night, S&P affirmed its rating and made it clear that if SA could keep improving its economic growth and its public finances, the positive outlook might lead to an upgrade of the rating itself.
But it cautioned that a sharper than expected global downturn, particularly from China, could subdue SA’s growth — and that pressures to increase spending on wages, grants and state-owned enterprises could worsen fiscal imbalances.
While the prospect that the government will implement some structural reforms is one of the reasons for the positive outlook, the agency cautioned that the outcomes of the ANC’s December conference could determine the pace of reform implementation, including on corruption. It expects the ANC may lose its majority vote in the 2024 general election.
S&P has incorporated R250bn of Eskom debt into its government debt assumptions for 2023 and is expecting that the government will offset the higher debt servicing costs by reducing transfers to Eskom.
“However, there is a risk that Eskom could continue to require additional government support to meet its maintenance and investment plans and immediate liquidity gaps,” said the agency. And though the government has said it will take a harder line on bailouts to state-owned entities, S&P expects the fiscal drain to SOEs to continue.
S&P is unusual in that it splits its foreign and local currency ratings on SA, with a foreign currency rating that is three notches below investment grade — in line with rival Fitch — and a local currency rating that is just two notches below, in line with Moody’s ratings on SA. S&P switched its outlook from stable to positive in May, making it the only one of the three agencies with a positive outlook, but the other two have stable outlooks, which means that SA is for now not threatened by further ratings downgrades.
Like S&P, Moody’s had pencilled in a ratings update on Friday night but did not release one. It did, however, issue a response last month to the government’s medium-term budget policy statement, in which it said it expected slightly slower fiscal consolidation than the government had projected, because of higher spending pressures and constrained growth.
Moody’s expects SA’s economy to grow at just 1%-1.5% over the next few years. S&P is somewhat more optimistic, with a forecast of 1.9% for 2022 tapering to average 1.7% over 20232025 — though this could be much lower in a downside global scenario. It noted too that SA’s real per capita GDP “has fallen over the past decade and will remain below that of several emerging market peers”.
Fitch does not follow a ratings update calendar, but it did issue a recent note responding to the launch of SA’s $8.5bn Just Energy Transition Plan (JETP) deal with an international partner group that was launched at COP27 recently. Indonesia and its 12-country international partner group also launched a $10bn JETP deal at COP27 last week, with a further $10bn promised by private sector global financial institutions.
Fitch said JETPs could push up sovereign debt for the emerging markets involved, but “we believe spending under such plans will remain subject to governments’ broader public finance goals.
“JETP funding for SA will mostly finance investments in the electricity sector that could help to alleviate serious power shortages”, the agency said.