South Africa risks falling further into sub-investment territory after Fitch Ratings Ltd. cut the outlook on its assessment of the country\u2019s debt to negative.<\/p>\n
Fitch reduced the outlook from stable while affirming the junk BB+ rating on nation\u2019s 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.<\/p>\n
The decision adds to the risk that the country could lose its last remaining investment-grade rating from Moody\u2019s Investors Service.<\/p>\n
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 \u201ccredit negative\u201d.<\/p>\n
Fitch\u2019s outlook change is due to a \u201cmarked widening in the budget deficit as a result of lower GDP growth and increased spending, including state-owned enterprise support.\u201d<\/p>\n
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.<\/p>\n
Fitch downgraded South Africa to junk in April 2017 after former President Jacob Zuma fired then-finance minister Pravin Gordhan. S&P Global Ratings\u2019 assessment is two steps below investment grade with a stable outlook.<\/p>\n
A failure to stabilise the debt-to-GDP ratio over the medium term, a further deterioration in South Africa\u2019s 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.<\/p>\n
The rand extended its decline against the dollar, sliding as much as 1.6% to a session low.<\/p>\n
The \u201cgovernment is aware of the strain and risk that state-owned companies, particularly Eskom, present to the fiscal framework,\u201d the Treasury said in an emailed response to the Fitch statement.<\/p>\n
\u201cGovernment 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\u2019s debt trajectory and improve economic growth prospects.\u201d<\/p>\n
Debt at the power utility, which Goldman Sachs Group Inc. called the biggest threat to South Africa\u2019s economy, has ballooned to more than $30 billion, and it isn\u2019t 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.<\/p>\n
Fitch said it will be challenging to make significant progress on restructuring the power utility because \u201ctrade unions, fearing privatisation and job losses, are strongly opposed to these measures.\u201d<\/p>\n