Fitch Ratings kept SA’s credit rating unchanged on Wednesday and maintained its negative outlook, highlighting the risks posed by the country’s low growth, rising government debt and exposure to state-owned entities (SOEs).

The decision comes after both its peer ratings agencies, Moody’s Investors Services and S&P Global, changed their outlook on SA-issued government debt to negative from stable in the wake of finance minister Tito Mboweni’s medium-term budget policy statement (MTBPS).

Fitch, as with S&P Global, already rates SA as sub-investment grade or junk status, while Moody’s holds SA at one rung above junk. 

Mboweni revealed in his speech that mounting government debt was expected to reach 71.3% of GDP within three years, with the budget deficit now expected to hover around 6% over the same period.

Marked deterioration

The marked deterioration in the government’s fiscal position has been pushed along by additional spending on ailing state-owned enterprises (SOEs), particularly crisis-stricken power utility Eskom, poor economic growth and revenue shortfalls.

Fitch said on Wednesday that the government confirmed the “significant deterioration” of the fiscal situation in the medium-term budget, “but took only limited adjustment measures”. 

Though Mboweni outlined plans to reduce government spending by R150bn over three years, with reductions earmarked for public sector wages, Fitch expected public sector unions to resist this.  

“Fitch believes substantial reductions in compensation expenditure could only emerge over the medium term, as powerful public sector unions will resist cuts, the current public sector wage agreement will only expire in March 2021, and efforts to curb payrolls have had limited success,” it said.

Contingent liabilities through public corporations “remain a significant rating weakness”, the agency said. It identified Eskom, whose debt represented 9% of GDP at the end of March, as the “biggest risk”. 

“Progress on Eskom’s turnaround strategy is likely to remain slow, partly stifled by trade union resistance against measures with potential implications for payrolls,” Fitch said.

The agency also sounded a warning over uncertainty created by proposed legislation on land expropriation, and the debate around the nationalisation of the SA Reserve Bank.

“While Fitch believes neither will have a significant direct negative impact, the debates could keep alive concerns among investors about the protection of private protection in a highly unequal society,” it said.

SA’s rating was supported however by strong macroeconomic institutions — notably the credibility of the central bank —  a “favourable government debt structure” and deep local capital markets, Fitch said. The domestic asset management industry — which holds funds of 196% of GDP — could support government funding if nonresident investors move out, the agency said.

Responding to Fitch’s assessment, the National Treasury said that the government remains committed to stabilising and improving its fiscal position.

“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,” it said in a statement.  

In response to the risks posed by SOEs, particularly Eskom, the Treasury said that government is providing support to Eskom, “to secure energy supply and to honour the state’s contractual obligations”. 

“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.”


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