S&P Global warns of rising debt and interest payments from SA SA

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Rating agency S&P GLOBAL yesterday warned of South Africa’s rising debt burden and significant interest payments as risks to the country’s fiscal outlook.

Speaking during a live webinar, S&P chief analyst Ravi Bhatia said slow progress in the rollout of Covid-19 vaccines and structural reforms would continue to hamper progress.

South Africa has vaccinated less than 2 percent of the population against Covid-19, while new infections are increasing in a number of provinces.

Bhatia said this would continue to hamper medium-term economic growth and limit the government’s ability to manage the debt-to-gross domestic product (GDP) ratio, despite South Africa’s short-term economic performance and the current account experiencing a cyclical increase.

South Africa’s gross loan debt is expected to rise from R3.95 trillion in the current fiscal year to R5.2 trillion in 2023/24, and stabilize at 88.9 percent of GDP in 2025/26.

Debt service costs are also expected to continue rising due to a higher budget deficit, inflation and exchange rates, to R269.7 billion in 2021/22 and R916 billion in the medium term.

“South Africa’s public finances remain structurally weak, with a high budget deficit, high debt and large contingent liabilities,” Bhatia said.

“Nevertheless, short-term budget deficits are narrowing slightly faster than previously forecast, reflecting recent higher-than-expected revenues.”

S&P confirmed BB’s sovereign credit rating of South Africa to be negative, three steps below investment grade, and maintained its stable outlook.

Bhatia said the outlook for both the local and foreign exchange rating was stable as South Africa’s credit strength should help offset relatively low economic growth and fiscal pressures.

She said S&P could downgrade its ratings if the South African economy does not recover during the forecast period and fiscal financing or external pressures increase.

“This could be due to, for example, further funding risks arising from contingent liabilities, including Eskom, or tightening funding conditions that increase the government’s interest burden as a percentage of revenue,” Bhatia said.

Investec economist Lara Hodes said electricity supply constraints remained a downside risk to growth as there was no end in sight to frequent power outages.

“Unreliable electricity supply remains one of the biggest downside risks to domestic economic growth,” Hodes said.

“It continues to hamper businesses, especially smaller players that are already struggling to survive the devastating financial impact of the pandemic.

“Eskom’s debt remains high at R410 billion and it remains a huge burden on the country’s tax authorities and remains a major concern for rating agencies.”

But in response to his speech on the budget vote in Parliament, President Cyril Ramaphosa said his government’s focus on economic reform is steadily but surely paying off.

Ramaphosa cited the soaring rand, commodity prices, rising home wages, low interest rates, growing exports and the first trade surplus in 18 years as examples of an uptick.

“We have to recognize that a number of key sectors, such as tourism, are still not fully operational and need time to recover. At the same time, they are a cause for optimism.

“We are well aware that the pace of structural reforms needs to be accelerated,” he said.

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