SA now on first rung of junk status – Fitch

The seemingly never-ending government bailouts to bankrupt Eskom have not only vexed taxed-to-the-max South Africans but also credit rating agency Fitch Ratings. Moody’s will have to follow suit not to lose face.

  • The rating agency, which followed S&P Global Ratings in placing South Africa’s creditworthiness to sub-investment grade (commonly known as junk status) in 2017, has taken another dim view of the country’s deteriorating fiscal and economic performance.
  • It has downgraded its outlook from stable to negative.  Fitch cited two reasons for its bearish decision; the increased support for struggling state-owned enterprises (SOE’s) such as Eskom, which will put the country’s worrying finances under more strain, and low economic growth.
  • Fitch said increased government spending on SOE’s has increased the rating agency’s projections for South Africa’s debt-to-GDP. This week, finance minister Tito Mboweni said the state might have to increase borrowing to fund an extra R59-billion in support for Eskom over the next two years. This will be on top of an already-promised bailout of R230-billion over the next ten years.
  • Eskom, which supplies more than 90% of the nation’s power, is facing a more than R400-billion debt load while its R25-billion revenue from the sale of electricity cannot cover its annual interest on the debt of about R50-billion.
  • About the government’s long-mooted plan to restructure Eskom into three separate units comprising electricity generation, transmission, and distribution, Fitch said: “trade unions, fearing privatisation and job losses, are strongly opposed to these measures and Fitch believes significant progress will be challenging.”
  • The National Treasury said it is aware of the “strain and risk” posed Eskom.  “A team of officials led by Directors-General of National Treasury and Public Enterprises has considered a number of options as a solution to Eskom’s debt challenge in order to ensure its sustainability, and the most viable of these will be communicated in due course.”
  • Making matters worse is that economic growth for 2019 that has been revised down, making it difficult for the government to stabilise finances over the medium term. Economic growth for 2019 that has been downgraded by the SA Reserve Bank, which expects the economy to grow by 0.6% – lower than government’s 1.5% official forecast.
  • Fitch said low economic growth projections imply that the government will not reach its targeted tax revenue of R1.42-trillion for the 2019/2020 fiscal year and might record higher debt.
  • Accordingly, Fitch expects South Africa’s debt burden to increase further to 68% of GDP by 2021/2022 (2018/2019: 57.3%) and not the 60% the government is budgeting for.  It expects the 2021/2022 debt percentage to continue rising over the next few years, while the government expects it to decline from 2025/2026.