South Africa risks falling further into sub-investment territory after Fitch Ratings Ltd. cut the outlook on its assessment of the country’s debt to negative.
Fitch reduced the outlook from stable while affirming the junk BB+ rating on nation’s foreign- and local-currency debt, it said in an emailed statement Friday. A negative outlook usually indicates that the next move could be a downgrade.
The decision adds to the risk that the country could lose its last remaining investment-grade rating from Moody’s Investors Service.
The company, which has a stable outlook on its Baa3 ratings, said on Thursday an additional R59 billion ($4.1 billion) in support that was announced for the debt-laded Eskom Holdings SOC Ltd. this week is “credit negative”.
Fitch’s outlook change is due to a “marked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise support.”
The extra money for Eskom will widen the budget deficit for this fiscal year to 6.3% of gross domestic product, compared with the 4.5% of GDP the government projected in February, Fitch said. Government debt is projected to increase to 68% of GDP by 2021-22 and could continue to rise after that, according to the company.
Fitch downgraded South Africa to junk in April 2017 after former President Jacob Zuma fired then-finance minister Pravin Gordhan. S&P Global Ratings’ assessment is two steps below investment grade with a stable outlook.
A failure to stabilise the debt-to-GDP ratio over the medium term, a further deterioration in South Africa’s trend GDP growth rate or increased vulnerability resulting from a current-account deficit and external financing needs would all lead to a downgrade, Fitch said.
The rand extended its decline against the dollar, sliding as much as 1.6% to a session low.
The “government is aware of the strain and risk that state-owned companies, particularly Eskom, present to the fiscal framework,” the Treasury said in an emailed response to the Fitch statement.
“Government is urgently working on stabilising Eskom, while developing a broad strategy for its future. Additionally, government will have to make tough decisions in order to reverse the country’s debt trajectory and improve economic growth prospects.”
Debt at the power utility, which Goldman Sachs Group Inc. called the biggest threat to South Africa’s economy, has ballooned to more than $30 billion, and it isn’t selling enough electricity to cover its operating and borrowing costs. President Cyril Ramaphosa announced in February that the company will be split into three businesses.
Fitch said it will be challenging to make significant progress on restructuring the power utility because “trade unions, fearing privatisation and job losses, are strongly opposed to these measures.”