Fitch Ratings: SONA highlights challenges to credit outlook

The scale of the challenges outlined in the South African president’s state of the nation address highlights factors behind Fitch Ratings’ Negative Outlook on the South Africa sovereign rating of ‘BB+’, the agency said in a statement today.

“President Cyril Ramaphosa’s speech on 13 February promised progress, but offered only partial detail on key policy areas, including stabilising the electricity sector, improving public finances, accelerating growth and land reform.”

Fitch said that the president repeated promises made by the minister of mines to more readily allow big power-consuming companies, particularly mines, to build their own electricity generation capacity.

“This could be transformative in eroding the monopoly of troubled state-owned electricity company Eskom, but it is still unclear whether licences will be easily obtainable. The government also promised to accelerate electricity generation by independent power producers, but we expect load-shedding to remain a problem, and concerns about stable electricity supply will continue to weigh on investment and economic growth more broadly.”

The president did not explicitly back proposals by COSATU, a trade union allied to the ruling ANC, to move ZAR250 billion (5% of GDP) of Eskom’s debt to the Government Employees Pension Fund and state development banks, “and we believe the measure is unlikely to materialise given legal and political challenges,” Fitch added.

“He did refer to ongoing discussions with stakeholders on reducing Eskom’s debt burden. However we expect any improvement in Eskom’s finances to be matched by deterioration in those of the entities taking over the debt, limiting the impact on the overall public-sector balance sheet.”

On public finances, the president promised that the budget to be released on 26 February will outline spending cuts. “He highlighted on-going negotiations with public-sector unions to reduce the wage bill, which accounts for 34% of consolidated government expenditure. Nevertheless, given that the current wage settlement will only expire in 2021, we do not expect any clear commitments on reducing the wage bill relative to previous plans.”

Fitch revised the Outlook on South Africa’s ratings to Negative from Stable in July 2019, due to the heightened difficulty of stabilising government debt/GDP over the medium term, as well as the downside risks to South Africa’s already very low growth potential. The rating was affirmed in December and the Outlook remained Negative.

“Mr Ramaphosa’s address offered no further clarification on land reform, after statements by ANC parliamentarians raised concerns that constitutional reform could be formulated to limit judicial oversight of expropriation without compensation.”

Fitch said it sees the discussion on land reform as largely symbolic, and believes the government will make only very limited use of any constitutional provisions for expropriation without compensation.

“This perspective was reinforced by the president’s commitment to provide more public land to settle land restitution claims. However, the discussion will continue to be of concern to foreign investors, as it highlights policy risks associated with the country’s exceptionally high level of inequality and the potential for social instability.”

The president listed a number of smaller, growth-enhancing measures, “but we believe their overall impact will be limited and would accumulate only over the long term. The government’s continued difficulties in implementing its agenda are illustrated by the fact that the president now aims to issue licences for new mobile phone spectrum by end-2020, after already announcing the relatively uncontroversial measure in the 2018 state of the nation address.

“The difficulty of addressing competing priorities of reducing inequality, raising growth, improving public finances and containing populism and in-fighting within the ANC will continue to limit the government’s ability to take more decisive steps to accelerate growth.”