Three strikes and you’re out, says Fitch

Ratings agency is going to look at three key events before determining its further outlook on South Africa

INTERNATIONAL ratings agency Fitch warned yesterday that the upcoming medium-term budget policy statement (MTBPS) would determine its further outlook on the country’s foreign sovereign debt after it slashed it to negative from stable.

Jan Friederich, Fitch’s head of the Middle East and African sovereign ratings, said the agency would look at three key events before making a decision – the most important being whether the government had been able to stabilise the debt to gross domestic product (GDP) ratio over the medium term.

“The debt ratio, for now, remains on an upward trajectory. So we will be looking very closely at the October MTBPS or the February Budget for signs of the measures government will be taking to stabilise the debt-to-GDP ratio,” Friederich said.

“Second, any signs that the GDP growth trend will continue to weaken will be quite negative for the creditworthiness, and third, we will be looking at the external vulnerabilities. South Africa is dependent heavily on portfolio investment inflows which makes the country vulnerable.”

The government drew the ire of ratings agencies when it tabled a special appropriations bill to rescue embattled Eskom to the tune of R59 billion over two years on top of the R69bn it announced in February.

Fitch reacted by downgrading its outlook to negative.

Standard and Poor’s also made comments about the slipping fiscal situation, but it was largely when Moody’s began to raise concerns that the market started to catch a wake-up.

Moody’s still has the country’s currency debt at investment grade, but its recent statements indicated it could join the other two in downgrading it to sub-investment.

The Bureau for Economic Research (BER) in its third-quarter economic prospects report said a particular feature of the latest forecast update showed a significant worsening in the country’s fiscal ratios.

BER said it expected the main budget deficit to be around 6 percent of GDP for the 2019/20 financial year, up from 4.5 percent the National Treasury forecast in the February budget.

Raymond Parsons, an economist at the North-West University Business School, said the additional bailout for Eskom would inevitably put an extra burden on the MTBPS.

Parsons said the bailouts and new expenditure spending in a falling tax collection climate would see a deterioration in South Africa’s public debtto-GDP ratios.

“The MTBPS will, therefore, need to embody a new fiscal plan on how the National Treasury will handle debt management in the period ahead. The markets and credit rating agencies, in particular, will critically interrogate the outcome,” Parsons said.

The Institute of International Finance last month said South Africa’s debt-to-GDP was fast approaching 60 percent after reaching 59.3 percent in the first quarter.

Friederich also said the infighting in the ANC was unfortunate and detrimental to quick decision making.

“The biggest problem to policy making is the infighting within the ANC, which means that a lot of attention is detracted from policy making. I would also say that policy making in South Africa is slow, because of the competing and complex objectives.”