Fitch Ratings Ltd. has cut the sovereign rating of South Africa, which threatens to push its economy into sub-investment territory. A reduction in rating from the stable level to the junk BB+ rating on nation’s foreign- and local-currency debt, does not augur well for the country at a time frantic efforts are being made to intensify the reform process. A negative outlook on the economy is normally indicative of the next move to downgrade the economy, which will considerably erode the business confidence including that of the foreign investors. The investment starved South Africa has announced an additional R59 billion (US$4.1 billion) in support for the debt-laded Eskom Holdings SOC Ltd. The factor which influenced Fitch’s outlook change was the marked increase in the budget deficit due to lower GDP growth and increased spending, including state-owned enterprise support. Though Fitch did not name Eskom as the cause for the widening of deficit, it is well known that the long term impact of the heavy allocation for the revamp of the power utility will be severe on the economy.
It is reported that Eskom’s revamp will widen the budget deficit for this fiscal year to 6.3% of GDP, as against the 4.5% of GDP the government projected in February. It is also estimated that the debt would increase to 68% of GDP by 2021-22 and could continue to rise after that, according to the rating agency. Of late, the South African economy is passing through a spate of problems, which compelled the rating agencies to downgrade the economy. Fitch’s downgrade to junk level first took place in 2017 after former President Jacob Zuma fired then-finance minister Pravin Gordhan.
South Africa faces a double whammy. It will have further setbacks if the economy fails to stabilize the debt-to-GDP ratio over the medium term. That will expose its vulnerability to widening current account deficit-a situation wherein difference between import and export goes beyond the manageable levels forcing the country to borrow externally, beefing up its increased external debt obligations. A fall out of that will be further erosion of Rand against dollar further widening the current account deficit. In short, the country has before it a difficult economic agenda and tough austerity measures
