S&P’s ratings move ratchets up pressure on government

The deeper we sink into junk territory the longer and more difficult it will be for SA to regain investment status. This grim economic reality is the consequence of years of mismanagement and state capture Elize Kruger, left Senior economist at NKC African Economics

● A late-night ratings announcement by S&P Global, though widely expected, has piled the pressure on the government to get its house in order.

On Friday the agency revised the outlook on government debt from stable to negative. It affirmed the long-term foreign currency debt rating at BB and the local currency debt rating at BB+.

S&P cited the continual bailouts of struggling SOEs, especially Eskom, and warned that this could drive the government’s debt rating further into junk status.

The negative outlook indicates that SA’s debt metrics are “rapidly worsening as a result of the country’s low GDP growth and high fiscal deficits”, the agency said. “Negative” indicates that a rating may be lowered.

S&P forecasts growth of 0.6% for 2019. Last month the National Treasury lowered its expectation from 1.5% in the February budget to 0.5%.

The impact on the currency and bond market is expected to be marginal. The rand was stable at R14.72 to the dollar after the S&P announcement.

Razia Khan, chief economist for Africa and Middle East at Standard Chartered, said S&P’s assessment was “widely expected”. She said muted reaction provides “important political cover to the Ramaphosa administration, and to the Treasury in particular, to pursue faster fiscal and structural reform”.

But there is now added pressure on finance minister Tito Mboweni to deliver the necessary fiscal adjustments in the February budget, she said.

S&P said: “We could lower the ratings if we were to observe continued fiscal deterioration, for example due to higher pressure on spending, rising interest costs or the crystallisation of contingent liabilities related to state-owned enterprises, especially Eskom.”

It said allocations to Eskom of R69bn over three years in addition to R23bn a year over a decade “have a significant impact” on the government’s finances and it expects Eskom will “likely be an enduring drain on SA’s fiscal resources”.

Weak tax revenue collection due to low economic growth and the need to accelerate structural reforms were also highlighted.

S&P could revise the outlook to stable if the government “credibly arrested the rise in the net government debt-to-GDP ratio, controlled fiscal deficits and improved SOEs”, and if there was improved growth.

The National Treasury said: “Government fully recognises S&P’s assessment of the challenges and opportunities which the country faces in the immediate to long term and remains committed to placing public finances on a sustainable path while aiming for inclusive economic growth.”

It added that the “government reiterates that the growth in the public sector wage bill needs to be addressed in order to reduce the debt burden”.

But collaboration between the government, labour, business and civil society is necessary “as difficult decisions that imply short-term costs for the economy and fiscus need to be made in order to turn the tide”.

S&P and Fitch Ratings were the first two of the three major global ratings agencies to downgrade SA to junk status, in 2017.

Moody’s holds SA’s remaining investment grade rating, but in October it lowered the outlook to negative and gave the government three months to improve its finances.

A downgrade by Moody’s could trigger investment outflows of more than R100bn from SA while raising borrowing costs across the economy and hampering the government’s ability to finance the budget.

Elize Kruger, senior economist at NKC African Economics, said: “Time is running out before another round of downward revisions will be upon us … With government reluctant to make difficult decisions that would potentially have a destabilising effect, given the expected reaction of labour unions, it is unrealistic to expect policy miracles will happen in the next three months.”

NKC expects Moody’s, S&P and Fitch Ratings to downgrade SA next year if the February budget disappoints. “Unfortunately, the deeper we sink into junk territory the longer and more difficult it will be for SA to regain investment status. This grim economic reality is the consequence of years of mismanagement and state capture.”