Fitch Says S. Africa’s Fiscal Targets Face Substantial Risks

Fitch, the ratings agency that cut South Africa’s sovereign credit rating to junk status in April shortly after former president Jacob Zuma appointed Malusi Gigaba as finance minister, on Friday issued a lukewarm report on Wednesday’s budget.

Eskom, forthcoming public sector wage negotiations, Zuma’s promise of free tertiary education and the planned introduction of national health insurance were among the issues Fitch said it was concerned about, AllAfrica reported.

The new budget deficit targets of 3.6% of GDP for the government’s 2020 financial year and 3.5% for 2021 were in line with Fitch’s forecast when it affirmed South Africa’s BB+ with stable outlook rating in November.

In October’s medium-term budget policy statement, Gigaba projected the national government’s debt reaching 61% of GDP in its 2021 financial year. Wednesday’s budget lowered the forecast of national government debt, excluding local government debt, to 56% of GDP.

“But it is still worse than in last February’s budget, which implied 2021 financial year debt of 52%,” Fitch said. “Fiscal targets are subject to substantial risks, the largest of which stems from state-owned enterprises, notably the electricity company Eskom, whose medium-term finances are under pressure from weak demand growth and the electricity regulator’s refusal to grant more substantial tariff increases,” said Fitch.

“The government does not foresee further capital injections for Eskom, and pointed to a number of potential measures, including private-sector participation, to improve its finances. But this approach will face significant political hurdles.”

Another concern of Fitch was public-sector wage negotiations ahead of the expiry of the current three-year agreement.

Meanwhile, ratings agency Standard & Poor’s Global says it has confidence in South Africa. But it adds a lot of work lies ahead before the country’s credit rating returns to investment grade.

The agency downgraded the country to junk status last year as state capture, among other things, ravaged investor confidence and some state-owned companies.

The agency’s Konrad Reuss believes the country’s economy is on the mend. “There’s a lot of goodwill out there now to get it right and to bring the economy back onto a more sustainable growth path. However, it’s not going to be easy.”