South Africa’s outlook is stable, but constrained by rising government debt – Fitch

Fitch Ratings has affirmed South Africa’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB-‘ with a stable outlook.

The agency says the country’s rating is constrained by high and still rising government debt, low trend growth and high inequality that it says will continue to complicate fiscal consolidation.

Fitch says the stable outlook has taken into account the government’s “strong efforts” to control expenditure, which if successfully continued, could bring debt stabilisation.

“However, at this stage we assume a substantial part of recent higher revenues to be temporary and see current public sector wage negotiations pointing to increased upward pressure on spending.”

Load shedding hit growth

Fitch expects South Africa’s GDP growth to slow from 1.6% in 2022 to 1.1% in 2023, due to weakening global growth and monetary tightening and fading support from post-pandemic re-opening, with only a mild recovery to 1.7% in 2024.

Load shedding is not expected to improve next year either.

“While substantial investments in increasing generation capacity are under way, there is a risk that the power supply imbalances deteriorate further with escalating effects on growth.”

The country is currently on stage 2 load shedding and will remain until further notice, said Eskom on Friday.

In a media briefing last month, Eskom Chief Operating Officer Jan Oberholzer warned South Africans to expect load shedding for the next 18 months.

“In terms of load shedding, I believe it’s here to stay for a period. Up until we have the additional capacity that we can fulfil the demand of the country, while at the same time we can give that respect to the plant and maintain it properly, we are going to sit with challenging situations.”

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Growth potential remains low

Fitch said the country’s growth potential, estimated at 1.2%, remains low and is a key credit weakness.

While the agency commended the progress on the government’s Operation Vulindlela, it said that full implementation, however, takes a long time.

The government’s Operation Vulindlela’s focus areas include stabilising the supply of electricity, reducing the cost and improving the quality of digital communications, finding a sustainable water supply to meet demand, establishing competitive and efficient freight transport and establishing a visa regime that attracts skills and grows tourism.

“There is also a risk that measures to improve transport infrastructure, a key part of the agenda, are merely offsetting an underlying deterioration, as worsening capacity issues amid rising demand have held back mining exports this year,” said Fitch.

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Deficit stabilising

Fitch expects the consolidated fiscal deficit to be 5.1% of GDP in the fiscal year ending March 2023 and to stay close to that level in the following two years.

This compares with the government forecast that the deficit will decline to 3.9% of GDP in FY24/25, from 4.9% in FY22/23, with the difference due to Fitch forecasting weaker government revenue and higher payroll spending.

Fitch also expects gross loan debt to rise from 68% of GDP in FY21/22 to 75% in FY24/25. This compares with debt stabilising at around 71% of GDP from FY22/23 in the government’s projections.

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Strong, possibly transitory revenue

South Africa’s revenue collection is expected to fall back relative to GDP, as profits in the mining sector normalise, assuming lower commodity prices and as economic growth slows.

“We also assume that following the large pandemic-related fluctuations, some of the recent strong revenue performance outside of the mining sector may prove transitory, although the recovery of the tax authority from the effects of state capture could be a more permanent factor,” said Fitch.

Payroll Risks; social grant

While the government’s debt stabilisation strategy relies heavily on restraining public sector payroll spending, this may prove difficult for South Africa with the ongoing public sector strike where parties cannot seem to come to an agreement.

The government has also extended the social relief of distress grant to FY23/24 and, given the upcoming election in 2024, is likely to renew it for FY24/25 as well, said Fitch.

“This would be largely covered by unallocated expenditure reserves, so the impact on deficits would be minimal unless calls for increasing the grant are pursued.”

Governance, socioeconomic challenges

Fitch says while there is uncertainty around the 2024 general elections, with the possibility of the ANC losing its majority, it did not expect the results to lead to immediate economic policy, as the ANC could be kept in power through coalitions.

Income inequality is still exceptionally high, said Fitch, with unemployment only moderately below pandemic-induced peaks.

“As a result, socioeconomic pressures will remain a constraint on fiscal consolidation.”

Compiled by Vhahangwele Nemakonde