Treasury reacts to Fitch's latest negative outlook

The South African government has taken note of ratings agency Fitch's decision to affirm the country's long-term foreign and local currency debt ratings at 'BB+' and maintain a negative outlook, National Treasury said in a statement on Wednesday afternoon.

South Africa's foreign and local credit ratings by Fitch remain one notch below investment grade.

According to Fitch, South Africa's ratings are constrained by low growth potential, high and rising government debt, large contingent liabilities as well as the risk of rising social tensions due to extremely high inequality.

Treasury points out that, nonetheless, the ratings remain supported by strong macroeconomic institutions, a favourable government debt structure and deep local capital markets.

At the same time, the negative outlook reflects uncertainty about the ability of the government to stabilise public debt over the medium term.

In response to that, Treasury said the SA government remains committed to the stabilisation and improvement of the country's fiscal position.

"(Fitch) acknowledges government's plans to stabilise its finances in order to achieve a balanced primary budget balance. Further, government will continue to work hand-in-hand with unions to manage the growth of the public sector wage bill in order to reduce government's debt burden," according to the Treasury statement.

"Government is also cognisant of the pressures and risks that state-owned companies, particularly Eskom, present to the fiscal framework.

Government is providing medium-term support to Eskom to secure energy supply and to honour the state's contractual obligations."

Treasury says in partnership with the Department of Public Enterprises, it is instituting a series of measures to bring discipline to Eskom's finances and to step up the timeline for restructuring.

"Continued collaboration between government, labour, business and civil society is essential in order to successfully implement all fiscal measures and growth-enhancing reforms," says Treasury.

In July this year, Fitch revised the SA economy's outlook from stable to negative. At the time, Fitch cited lower GDP growth and increased spending on state-owned entities as a reason for the rating decision. This came after the National Assembly accepted the special appropriation bill to give Eskom an additional R59bn financial boost over two years.

At the beginning of November this year, Moody's downgraded the outlook for its credit rating of the South African government from "stable" to "negative". This is the final step before it strips South Africa of its "investment grade" Baa3 long-term foreign-currency and local-currency issuer rating, which will leave it at "junk".

At the time, Moody's said the negative outlook signals in part its rising concern that the SA government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth.

The Moody's announcement followed the medium-term budget policy statement by Finance Minister Tito Mboweni and painted an extremely grim picture of government finances.

Fin24 reported at the time that the SA government's debt-to-GDP ratio, which as recently as two years ago was at 50.6%, is currently 61% and will grow to above 71% of GDP by 2022.

Government is forking out billions of rands in bailouts for a bleeding Eskom and other state-owned entities, while tax revenue this year will be more than R50bn lower than expected as business and households struggle in a weak economy.

Late in November this year, S&P Global Ratings changed its outlook on South Africa's sovereign credit rating to negative, citing low GDP growth, rising fiscal deficits and a growing debt burden.

The rating agency warned that it may lower the rating if it observed continued fiscal deterioration due to higher pressure on spending, rising interest costs, or the "crystallisation of contingent liabilities related to state-owned enterprises, especially Eskom".

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