Fitch revises South Africa’s outlook to negative
Fitch Ratings has revised the Outlooks on South Africa's Outlook to Negative from Stable, while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-'.
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The issue ratings on South Africa's senior unsecured long-term foreign- and local-currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB'. The Short-Term Foreign and Local Currency IDRs and the issue ratings on senior unsecured short-term local currency securities have been affirmed at 'F3'. The rating on the RSA Sukuk No. 1 Trust has also been affirmed at 'BBB-', in line with South Africa's Long-Term Foreign Currency IDR.
The revision of the Outlooks on South Africa's Long-Term IDRs to Negative reflects the following key rating drivers:
Political risks to standards of governance and policy-making have increased and will remain high at least until the electoral conference of the African National Congress (ANC) in December 2017, negatively affecting macroeconomic performance. The conference will elect a new ANC leader, who will be the ANC's presidential candidate in national elections in 2019.
The in-fighting within the ANC and the government is likely to continue over the next year. In Fitch's view, this would distract policymakers and lead to mixed messages that would continue to undermine the investment climate, thereby constraining GDP growth. A report by the public protector made allegations of influence peddling and improper procurement practices involving close allies of the president, although it would be subject to a judicial review and a commission of enquiry. The report underlines the risks to state-owned enterprise (SOE) governance and has led to the resignation of the CEO of the state-owned electricity company Eskom.
The South African economy may have started recovering from a series of shocks, but business confidence remains depressed and investment has continued to contract. We expect only modest GDP growth of 1.3 per cent in 2017 and 2.1 per cent in 2018, although this is an improvement from 0.5 per cent in 2016. The economy had been hit in 2015 and 2016 by electricity shortages, the worst drought in decades, a sharp fall in international prices for some of South Africa's main mining commodities and rising policy uncertainty.
As a result of low GDP growth and weaker-than-expected tax revenues, the government in its Medium-Term Budget Policy Statement (MTBPS) raised the budget deficit forecast for the fiscal year ending March 2017 (FY16/17) to 3.4 per cent of GDP from 3.2 per cent in the February budget, with a gradual narrowing to 3.1 per cent in FY17/18, 2.7 per cent in FY18/19 and 2.5 per cent in FY19/20. The deterioration would have been worse without the government's decision, announced in the MTBPS, to raise additional revenue of ZAR13bn and lower the expenditure ceiling in FY17/18. Together with measures included in the February budget, fiscal tightening in FY17/18 relative to previous plans will amount to one per cent of GDP. The government has not announced which taxes are to be raised, but the fiscal targets now look only mildly optimistic. Fitch expects the deficit to shrink to 2.8 per cent in FY18/19 from 3.2 per cent in FY17/18.
Total general government debt (including local government debt not covered by the MTBPS debt numbers) will rise to 55 per cent at end-March 2019 from 51.5 per cent at end-March 2016. The debt structure remains highly favourable, with 90.7 per cent of debt denominated in local currency and an average maturity of government debt securities of 14.6 years at end-September 2016.
Additional spending on student bursaries as a result of student protests was absorbed by using the contingency reserve, some one-off financing and a re-prioritisation of other expenditures, but the protests showed that social pressures could lead to further spending needs. Growth of the working age population of around 2 per cent and high and rising unemployment, at 27.1 per cent in the third quarter, also contribute to spending pressures. However, the fact that expenditure ceilings introduced in 2012 have never been breached suggests such pressures have so far been well managed.
The debt of SOEs remains an important contingent liability to the sovereign. The debt of the nine major SOEs amounted to ZAR743bn (18.2% of GDP) at end-March 2016, of which ZAR280bn was subject to government guarantees. In addition, the government provides guarantees on electricity prices to independent power producers complementing Eskom's electricity generation.
ANC factional battles may undermine government’s efforts to improve the governance of SOEs, which can affect the plan to stream-line the SOE portfolio. The plan to build nuclear power stations has run into substantial opposition because of concerns about governance. As a result, the government announced in November that the first plant would not be commissioned until 2037, alleviating concerns over any medium-term fiscal impact. CNBC AFRICA/GB