Fitch takes grim view on SA, changing its outlook to negative
SA could plunge further into junk status after Fitch Ratings changed SA’s outlook to negative from stable on Friday, citing a widening in the budget deficit.
The credit ratings agency changed SA’s outlook on its long-term foreign-currency issuer default rating, while affirming the rating itself at BB+, one notch below sub-investment grade.
“The outlook revision reflects a marked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprises (SOEs) support, increasing our projections for government debt to GDP and heightening the difficulty of stabilising debt to GDP over the medium term,” Fitch said in a statement.
The agency expects growth of just 0.5% this year, lower than the Reserve Bank’s projection of 0.6%, and well below the National Treasury’s 1.5%, due to continued weak gross fixed investment and subdued private consumption.
The change to the outlook follows an announcement from the finance minister that the government will give an additional R59bn in support for embattled power utility Eskom.
“To fix the underlying ongoing losses, support from the government is intended to be combined with consolidation and restructuring measures, including a separation of electricity generation, transmission and distribution into different business units,” Fitch said.
“However, trade unions, fearing privatisation and job losses, are strongly opposed to these measures and Fitch believes significant progress will be challenging.”
On Thursday, Moody’s Investors Service said the government will struggle to absorb the costs of the additional support to Eskom, calling the funding a “credit-negative”.
Moody’s is currently the only major agency that rates SA’s credit as investment grade. Should it downgrade SA to junk status, the country will fall out of global bond indices, which are tracked by global investment funds, prompting automatic selling of local debt instruments.
Fitch also warned that continued infighting within the ANC would distract the government from making vital policy decisions. It did, however, say the Reserve Bank, which has been the subject of much debate within the ANC, and its inflation-targeting regime was credit-positive.
In response, the Treasury said in a statement on Friday: “The government is aware of the strain and risk that SOEs, particularly Eskom, present to the fiscal framework. The government is urgently working on stabilising Eskom while developing a broad strategy for its future.”
It added that a team of officials, led by the Treasury and the department of public enterprises, has considered a number of options as a solution to Eskom’s debt challenge and will communicate the most viable in due course. “Additionally, the government will have to make tough decisions in order to reverse the country’s debt trajectory and improve economic growth prospects.”
Fitch is one of two agencies that rate the country’s creditworthiness at sub-investment grade following a surprise cabinet reshuffle when former president Jacob Zuma fired finance minister Pravin Gordhan, in March 2017.