Economists at the Institute of International Finance (IIF) have warned that South Africa’s debt situation is becoming dire, and if the government takes on R150 billion worth of power utility Eskom’s debt – as is currently being discussed – could hit 90% of GDP in “just a few years”.
The IIF previously identified South Africa’s weak economic growth as a key factor in the country’s declining debt health, but other major challenges exist, including persistently large external imbalances and the possibility of sizable non-resident portfolio outflows in the event of a rating downgrade by Moody’s to below investment grade, it said.
“Following Moody’s downgrade of South Africa’s outlook from stable to negative on November 1, the risk of a loss of the country’s investment grade rating over the next 12-18 months has risen markedly.
“Without a credible debt stabilisation strategy set out in the 2020 budget (to be published in February), a downgrade could occur as early as March.”
This would lead to the exclusion of South Africa from the FTSE World Government Bond Index (WGBI) and could trigger substantial non-resident portfolio debt outflows, given the country’s weight in the index.
The IIF also highlighted other major concerns:
- High risk of ratings downgrade, pushing foreign investment offshore;
- Government’s plan for Eskom has been judged by the market as insufficient;
- Growth is likely to remain weak at between 0% to 1.5%;
- Unemployment is expected to rise, putting pressure on private consumption;
- Tax revenue is expected to fall short;
- Moves to cut spending by government likely to be blocked by unions;
- Eskom power outages push investors away;
- Lack of skilled labour.
“Fiscal consolidation will require substantial cuts to government spending, especially the public sector wage bill as well as support to struggling SOEs such as Eskom and South African Airways. However, such measures will be politically difficult due to strong resistance from powerful labor unions,” it said.
The group said that the key problem facing South Africa, in terms of output growth, is a lack of investment, which has halved potential growth estimates for the country.
Even though the government is trying to boost investment, and thus potential growth, by lowering bureaucratic and administrative hurdles to foreign participation, things like continued power cuts as a result of Eskom’s operational problems, as well as other supply constraints such as the difficulty to find skilled labor, remain major factors pushing investors away.
“As a result, growth will likely remain weak in the medium term in the absence of structural reforms and, consequentially, debt dynamics are not expected to improve,” the IIF said.
“In fact, should the government be forced to take over a substantial share of Eskom’s R420 billion obligations (with around R150 billion being discussed), debt as a share of GDP could rise above 90% of GDP in just a few years.
“As we have concluded in previous publications, time is running out.”