South Africa is sinking deeper into a debt trap
South Africa is paying more to borrow than its emerging-market peers because the slow pace of reforms is dampening economic growth, according to Moody’s Ratings.
“We think these are the issues that are weighing on the cost of debt,” said Moody’s Senior Vice President Lucie Villa.
Investors feel that while South Africa is “not on the verge of a crisis, there is this kind of slow deterioration happening and that, no matter what — even with a leadership that is trying to address this issue — it’s proving very, very challenging,” she said.
Long-term rates in South Africa exceed those in most emerging-market economies except Brazil and Mexico, Moody’s data show.
Africa’s largest economy has grown less than 1% on average annually for more than a decade, hamstrung by disintegrating infrastructure, graft, crime, logistics and energy constraints.
A study conducted by Investec Wealth & Investment International found that the economy is at least 37% smaller than it would have been had it tracked its EM peers and sustained annual growth of 4.5% since 2010.
A coalition government formed by the African National Congress after it lost its outright majority in last year’s elections hasn’t managed to significantly accelerate reforms to speed up growth.
The low growth has denied the country much needed tax revenues, leaving it reliant on external funding, Moody’s said.
“You have high debt costs, and then the government wants to do something to revive its economy and private sector,” Villa said.
“But to do that, they need to invest. And to invest, they have to borrow, and they are borrowing at high rates.” This results “in a negative feedback loop that is difficult to break,” she said.
The country’s ratio of debt to gross domestic product has more than doubled over the past 15 years and the National Treasury expects it to peak in the current fiscal year ending March 31 at 77.4%.
Some of the solutions Moody’s proposes include hastening the implementation of reforms to improve the operation and management of critical industries like electricity, water, and transport and rationalise borrowing.
The state should also seek concessional funding from development partners to help lower foreign-currency costs where possible, the agency said.
“Mixing normal debt with debt that is less expensive, limiting the amount of borrowing during the bridge period, and pushing in on your medium-term reform agenda” could put the country back on track, Villa said.
Debts rising
Another ratings agency, Fitch, has added to the worrying picture for the country, projecting in a recent review that South Africa will overshoot its debt target.
While the National Treasury expects debt to GDP to peak at 77.4%, Fitch expects it to reach almost 80% in 2027, putting it well above its peers.
South Africa still has an elevated vulnerability to default risk, it said, particularly in the case of unfavourable changes in business or economic conditions.
The ratings agency pointed to perennial problems such as low real GDP growth, high levels of poverty and inequality, a high and rising government debt-to-GDP ratio, as impediments to economic recovery.
While it expects debt to accumulate more slowly over the years, many state-owned companies will continue to rely on the government for bailouts and financial support.
This will continue to add pressure on the fiscus, the group said.
With Bloomberg
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