South Africa gave up the gains it made following finance minister Enoch Godongwana budget speech on Wednesday.<\/p>\n
Following the budget, where the minister announced that the government would take on more than half the debt of the failing national power utility Eskom, the local unit staged a rally, trading stronger on the news.<\/p>\n
The National Treasury proposed a total debt-relief arrangement of R254 billion for Eskom – the primary driver for low economic growth in the country.<\/p>\n
As stated in the budget, the relief will be provided in two parts: R184 billion will cover Eskom’s full debt settlement requirement over the medium term, while R70 billion will be a direct take-over of Eskom’s loan portfolio in 2025\/26.<\/p>\n
This debt relief means that Eskom will not need to borrow any further during this period.<\/p>\n
Around the time of the announcement, the rand traded at R18.17\/$, about 0.42% stronger than its previous close. Earlier in the day, before the budget speech, it had hit R18.38\/$, its lowest since November.<\/p>\n
However, in afternoon trade on Thursday, these gains had been lost, with the currency weakening to R18.34 to the dollar.<\/p>\n
While markets welcomed the\u00a0long-awaited answer to the utility’s debt, the reality of South Africa’s economic fundamentals and the looming greylisting by the Financial Action Task Force (FATF) on Friday kept things muted.<\/p>\n
During his budget speech, Gogongwana said that the country should be prepared for the possibility of being greylisted.<\/p>\n
In the budget itself, National Treasury said that “over the longer term, government has asked the FATF to formally reassess South Africa\u2019s compliance during its June 2023 plenary”.<\/p>\n
This advance alert for another review has been taken by some investors to mean that a greylisting is now likely, and even expected by the government.<\/p>\n
Investec’s chief economist Annabell Bishop also noted the Eskom debt relief negatively impacts the country’s debt ratio.<\/p>\n
“Gross debt of the government is consequently now projected to stabilise at 73.6% of GDP in 2025\/26. Previously the projection was estimated to peak at 71.1% in 2022\/23,” said the economist.<\/p>\n
South Africa’s currency is still at the whim of domestic growth estimates and a possible credit downgrade, she added.<\/p>\n
According to Bishop, the key credit rating agencies (Fitch, Moody’s and S&P) already rate South Africa’s debt as including all Eskom and other state-owned entity debt, which government holds guarantees over, and so the impact should be credit neutral.<\/p>\n
Global ratings agency Fitch, as stated by Bishop, said prior to the national budget speech that low growth potential at 1.2% remains a key credit weakness, a further weakening of trend growth or a shock that further undermines fiscal consolidation efforts that could result in a negative rating action.<\/p>\n
“There is some headroom at the sovereign’s rating of ‘BB-‘ to absorb a temporary impact on economic metrics from load-shedding, but a failure to address the problem over the medium term could add to downward pressure on the rating,” said Bishop.<\/p>\n
She said that in the budget, there were some improvements in fiscal projections.<\/p>\n
The budget deficit for 2022\/23 lowered to -4.2% of GDP, dropping from the previous estimate of -4.9% of GDP.<\/p>\n
It is expected to reach -3.2% by 2024\/25.<\/p>\n
“The downward revision of the National Treasury’s economic growth forecast for 2023 to 0.9% y\/y from 1.4% y\/y is in line with the consensus once a couple of outliers are removed. 2024 sees a slight drop to 1.5% y\/y from 1.7% y\/y.”<\/p>\n
This has only a mild effect on the fiscal ratios, while the overall improvement is that a primary surplus occurred earlier, in the current fiscal year, instead of in 2024\/25, Bishop said.<\/p>\n
The rand is currently trading at:<\/p>\n