The ratings agency added further pressure on President Cyril Ramaphosa to appoint a credible Cabinet, saying it was keeping a keen eye on the composition of the incoming administration and the policies it would pursue to address South Africa’s key credit challenges.
Moody’s said fiscal spending had escalated above the country’s sluggish growth and weakening revenue collection. It said without a strong policy response to spending, a weakened tax base and nominal growth for South Africa’s debt levels, the country’s sovereign debt could be downgraded to sub-investment.
“In the absence of effective policy change, the sovereign’s credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low,” Moody’s said. “Fading prospects of policies that will sustain fiscal and economic strength, alongside any signs of diminishing resilience to shocks, would put downward pressure on the country’s rating.”
Moody’s is the only one of the major rating agencies that still have the country’s sovereign debt above junk. The agency is expected to release its next review in November.
Moody’s said that it expected South Africa’s growth to remain muted in the medium-term.
Last month Moody’s said its baseline scenario estimated that the debt-to-GDP ratio would reach 65 percent of GDP by 2023. However, it warned that upside pressures remained from potentially larger state-owned entities support packages than planned, as well as slower growth and higher interest rates.
The National Treasury has already warned that the debt-to-GDP ratio would climb to 60percent by 2021/22, with Finance Minister Tito Mboweni charging that if the government failed to rein it in, it could escalate worse than anticipated.
Yesterday Moody’s said that while the government still had a favourable government debt structure, a large pool of domestic investors and a diversified economy that could insulate its credit profile from shocks and provide some time for policies to address the challenges, President Ramaphosa’s incoming administration would be faced with deeper structural inefficiencies and a rising debt.
Investec chief economist Annabel Bishop said Moody’s note served as a stark warning that South Africa could face a lower credit rating if policies did not sufficiently address rising sovereign debt and economic growth.
“Absent successful reforms, the rating agency has indicated quite clearly that South Africa could instead face a loss of its investment grade dual currency sovereign long-term debt rating, to below that of its current Baa3-rated peers,” Bishop said.
Moody’s acknowledged that the country’s credit profile was supported by a diversified economy, a sound macroeconomic policy framework and a deep pool of domestic investors, due to a well-developed financial sector and markets.
However it repeated its warning that Eskom would remain the main source of contingent liability risk.
Eskom, whose financial and operational challenges have dominated much of Ramaphosa’s 16 months rein, was given R5billion in emergency funds just weeks before the elections, to enable it to meet obligations.
Fitch, which was the first to provide its insights into last week’s elections, warned that implementing the turnaround plan for Eskom will depend on overcoming trade union objections.
Energy expert Grové Steyn said given Eskom’s systemic role in the economy, government should avoid a default on debt.
“Eskom is indeed in a debt trap. It is now being bailed out by the government on a daily basis and even the R23bn allocated in the Budget is not going to be enough to fill the gap and get Eskom out of the debt trap,” Steyn said.