Moody’s Investors Service sees South Africa’s ratio of debt to gross domestic product deteriorating should the country fail to contain spending and funding risks from the state power company.
Non-implementation of policies aimed at lowering the fiscal deficit from levels of about 4.5% to 5% of gross domestic product would push the debt-to-GDP ratio, including guarantees to Eskom, above 70%, the credit-rating company said in an emailed statement Wednesday.
The Treasury’s worst-case scenario is for gross debt to deteriorate to 60.2% of GDP in the fiscal year ending February 2024.
Eskom is the biggest threat to Africa’s most-industrialised economy, according to Goldman Sachs.
The producer’s debt is approaching R500 billion ($35 billion), according to data compiled by Bloomberg from public records, including bonds and issued loans, up from about R370 billion a year ago and is compounding the difficulty the government faces in formulating a turnaround plan for the troubled utility.
Moody’s, the only major ratings company to assess South Africa’s debt at investment grade, sees “arresting and ultimately reversing the rising debt trend” as the main challenge facing President Cyril Ramaphosa’s new government, elected 8 May.
While the nation’s long-term growth outlook remains weak and the country’s fiscal strength is eroding, a proven resilience to absorbing financing shocks still supports the economy’s credit profile, it said.
“South Africa has strengths, including a favourable government-debt structure, a large pool of domestic investors and a diversified economy that insulate its credit profile from shocks and provide some time for policies to emerge that will address those challenges,” Moody’s said.
“However, 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.”
South Africa’s foreign debt is already rated junk by S&P Global Ratings and Fitch Ratings, and retaining the investment-grade assessment at Moody’s depends on how the government approaches the fiscal deficit and financial troubles of state-owned companies after the election.