Ratings agency S&P Global cuts outlook on South Africa, citing impact of load-shedding on economy

The action by the agency highlights the affect of load-shedding on the economy’s prospects, and the slow pace of measures aimed at resolving other challenges confronting the country. Ellis Mnyandu reports.

South Africa was dealt another heavy blow when US ratings agency S&P Global unexpectedly reduced its outlook to ‘stable’ from ‘positive’ for the country’s debt, saying measures aimed at stabilising state-owned enterprises were slow, compounding the effect of ongoing power outages on the economy.

The ratings agency also warned it could cut the outlook even further.

“We could lower the ratings if the ongoing implementation of economic and governance reforms does not progress as planned, resulting in further deterioration in economic growth, or higher-than-expected fiscal financing needs.

“This could, for example, result from a deepening of the electricity crisis or if critical infrastructure constraints worsen,” the ratings agency said in a statement earlier this month.

Its action followed just two weeks after the presentation of the national budget by finance minister Enoch Godongwana on February 22. In his budget, he announced that National Treasury would now assume Eskom’s debt of R254 billion, a measure the government expected to give the utility some financial breathing room to tackle maintenance and capital expenditure needs.

The agency said power outages and infrastructure constraints were the biggest issues weighing on economic growth, offsetting progress elsewhere.

“Despite the government’s attempts at reforming the power sector, acute electricity shortages pose downside risk to both short- and mediumterm growth prospects,” S&P said, noting that the economy had suffered a broad contraction of 1,3% over the fourth-quarter of 2022 as electricity cuts rose sharply during the period.

ECONOMIC GROWTH

The downturn was broadbased, with the agriculture and mining sectors seeing the largest declines.

S&P said it had also reduced its 2023 economic growth forecast to 1% from 1,5% previously, and it now expected growth to average 1,7% in 2024-2026.

“Downside risks to this forecast remain prominent, since South Africa has been unable to fully capitalise on the global upswing in commodity prices,” S&P added.

Furthermore, unemployment remained stubbornly high, particularly among young people, S&P noted.

A reduction in the country’s credit outlook generally means investors could be wary about the country’s debt, and could demand a higher rate of return on the debt issued by the government.

S&P said that although South Africa had also been grey-listed at the end of February by the Financial Action Task Force for structural deficiencies in dealing with money laundering and other illicit financial flows, the move was unlikely to “significantly affect South Africa’s creditworthiness since the government retains access to deep domestic capital markets.”

RESPONSE

In its response, National Treasury said in a statement government acknowledged higher economic growth and a durable recovery in economic activity required a stable macro-economic framework, complemented by rapid implementation of economic reforms and improved state capability.

“Government is taking urgent measures to reduce loadshedding in the short term and transform the sector through market reforms to achieve long-term energy security. Other reforms are under way to improve performance in the transport sector, in particular freight rail,” National Treasury said.

“In addition, fiscal consolidation measures have positioned the public finances to absorb a portion of Eskom debt, maintain support for the economy and the most vulnerable, and make budget additions to fight crime and corruption.”