JOHANNESBURG – International rating agency Fitch on Wednesday left South Africa open to a further downgrade after it reaffirmed the country’s credit rating at one notch below investment grade and maintained its negative outlook.
Fitch said the country’s long-term foreign and local currency debt ratings remained worrisome at BB+, with low growth potential, high and rising government debt, large contingent liabilities and the risk of rising social tensions due to extremely high levels of inequality.
The agency said the negative outlook reflected the uncertainty over the government’s ability to stabilise public debt in the medium term. Fitch said contingent liabilities remained a significant rating weakness, with liabilities of non-financial public corporations at 15.9 percent of gross domestic product (GDP) at the end of March.
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It said additional contingent liabilities related to public financial corporations and independent power producers were less sizeable and less likely to materialise.
“The biggest risk is Eskom, which at end-March had debt of 9 percent of GDP, and has been granted government support of R138 billion (2.7 percent of 2019 GDP) for FY19/20 to FY21/22,” Fitch said. “Debt relief for Eskom, for example through a transfer of debt to the government, is under discussion, but this is not included in our debt projections, as it is unlikely to materialise in the near term.”
Fitch said Eskom’s turnaround strategy was likely to remain slow and partly stifled by trade union resistance against measures with potential implications for payrolls.
The review comes months before Moody’s is due to give its outlook in February. Last month, S&P and Moody’s revised the country’s investment-grade credit rating to negative.
Fitch said the Medium-Term Budget Policy Statement in October confirmed a significant deterioration of the country’s finances and it took only limited adjustment measures.
South Africa’s fiscal framework has weakened substantially since February, with the national debt exceeding R3 trillion and a budget deficit projected at 5.9 percent of GDP.
Fitch said the ratings, however, remained supported by strong macroeconomic institutions, a favourable government debt structure and deep local capital markets.
The National Treasury said the government remained committed to the stabilisation and improvement of its fiscal position.
“The agency acknowledges government’s plans to stabilise its finances in order to achieve a balanced primary budget balance,” the Treasury said.
“Further, government will continue to work hand-in-hand with unions to manage the growth of the public sector wage bill in order to reduce government’s debt burden.”
The Treasury also said that the government was cognisant of the pressures and risks that state owned companies, particularly Eskom, present to the fiscal framework.
“The government is providing medium-term support to Eskom to secure energy supply and to honour the state’s contractual obligations,” the Treasury said. “National Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to bring discipline to the utility’s finances, and to step up the timeline for restructuring.