S&P remains cautious on SA due to the Eskom debt transfer, grants, and the 2024 election

Although Standard & Poor’s reaffirmed South Africa’s credit rating two weeks ago, the government’s decision to take over some of Eskom’s debt, as well as rising civil servant and social welfare bills, pose credit risks.

On November 18, the US credit rating agency affirmed South Africa’s ‘BB-/B’ long- and short-term foreign currency sovereign credit ratings, as well as its ‘BB/B’ long- and short-term local currency sovereign credit ratings, with a positive outlook.

It stated that, while threats remain, higher-than-expected tax revenue, which is expected to reduce South Africa’s fiscal deficit, contributed to the positive outlook.

Finance Minister Enoch Godongwana announced the government’s commitment to assume a portion of Eskom’s debt, which currently stands at R400 billion, during the October mini-budget. According to Godongwana, the government will assume up to R266 billion of Eskom’s debt.

The agency is now monitoring how the debt transfer will affect South Africa’s fiscal position. Without Eskom’s debt, the country’s debt and fiscal assessments were already weak. If it has a significant impact on the country’s fiscal trajectory, the outlook could be revised downward, according to S&P, which released its credit outlook for 2023 on Wednesday.

“We are now including two thirds of Eskom’s debt in our government debt figures from next year onwards,” said Zahabia Gupta, S&P director for sovereign and international public finance ratings.

“This is partly the reason why we have net debt increasing from 60% of GDP this year to 72% next year.”

Gupta warned that Eskom may not be able to resolve all of its financial and operational issues on its own and may require additional government assistance.

“Another area where we see some risk is the social relief [of distress] disaster grant … It is likely that this will be maintained in some permanent form or another, given the political pressure we’re seeing regarding this grant,” said Gupta.

The S&P’s cautious tone extends to the civil servants’ wage bill, which is under pressure from unions demanding double-digit salary increases, as well as social pressure from the ANC’s December elective conference and the 2024 general elections.

‘Running out of money’

According to Wits Business School Professor Jannie Rossouw, South Africa’s entire fiscal position is in jeopardy, and its affordability levels have largely declined.

“In my view, the government cannot afford social relief grants on a sustainable basis, nor can the government afford higher wage adjustments for civil servants …

“What we’re seeing now is that government is running out of money,” Rossouw said.

He went on to say that South Africa faces additional risks as a result of a lack of leadership, and that parliament has lost its ability to exercise oversight over the government.