No easy way out of junk for South Africa – but Eskom is at the core

With South Africa barely holding onto its final investment grade credit rating held by Moody’s, managing director for Sub Saharan Africa at S&P Global, Konrad Reuss says that it could take years, even decades for the country to find its way out of junk status.

S&P Global is one of the three major ratings agencies that provide in-depth analysis of the South African sovereign – the other two being Fitch and Moody’s.

S&P was the first downgrade South Africa’s sovereign rating to sub-investment grade in 2017 (also called junk, or speculative grade), which was followed by Fitch in the same year. Only Moody’s has since held South Africa above this level.

Speaking to 702, Reuss noted that even though the plunge to speculative grade happened in 2017, South Africa entered a downgrade cycle long before that, starting in 2012.

A downgrade cycle, he said, also isn’t so easily reversed, with the average time taken to get out of junk by other countries coming at seven or eight years. Some countries have taken as long as 20 years to achieve this.

South Africa’s big challenge

The big challenge facing South Africa, Reuss said, is that all of the factors that have led to this downgrade cycle “all hang together” – meaning that to fix any one of the problems would mean having to fix them all.

This includes massive problems like a rising fiscal deficit; a rising debt burden; low economic growth; tax collection challenges; as well as the host of structural reforms needed to bring state-owned companies under control.

“There’s just no room for fiscal stimulation under these conditions,” he said.

At the core of this is Eskom, which is by far the largest contingent liability – or more a real liability – facing government, simply because of the sheer scale of support it needs from the national budget. Bailouts over the next three years is a massive burden on the budget that needs to be addressed, he said.

Problems at Eskom are also what is driving the country’s energy crisis, which is suppressing economic growth.

While Reuss believes the splitting of Eskom into smaller entities is likely a positive move – the fiscal burden at the company remains and needs to be addressed as soon as possible. Tied to this are labour issues, which are also a major obstacle.

“There are stark operational challenges (at Eskom)…they need to be sorted out as soon as possible to kick-start the economy again,” he said.

Reuss said it is up to Moody’s to lay out any reasoning for any ratings change it may or may not make on South Africa’s sovereign, but he noted that a downgrade would push the country fully into sub-investment grade, and will likely lead to capital outflows and place pressure on the rand.

Moody’s is expected to deliver a rating review along with other agencies in March, following the 2020 budget speech.

Read: South Africa central bank says Moody’s rating cut could risk $8 billion selloff

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No easy way out of junk for South Africa – but Eskom is at the core