Moody’s warns of South Africa’s debt rising above 100%

South African government debt could rise by 40 percentage points over the next three years as strong, widespread fiscal pressures and persistently low economic growth weigh on the nation’s credit profile, according to Moody’s Investors Service.

That would push government debt as a percentage of gross domestic product well over 100% and much higher than the 87.4% peak the Treasury projects for 2023-24 under its active management scenario.

Increased spending driven by a R500 billion ($29.6 billion) stimulus package to shore up the economy against the impact of the coronavirus pandemic will widen the budget deficit to 15.6% of GDP and take debt up to 89.9% this fiscal year, Moody’s analysts led by Paris-based Lucie Villa said in a credit opinion published Thursday.

That’s despite the government’s efforts to fund the package by reprioritising spending and compares with the Treasury’s projection of 81.8%.

Africa’s most industrialised-economy will shrink by 6.5% this year due to the virus and strict lockdown measures that halted almost all economic activity for five weeks from 27 March, Moody’s said.

That compares with its previous forecast for a 2.5% contraction and the government’s projection of a 7.2% drop in output.

There is also a risk of “further fiscal drains” from state-owned companies as the virus constrains activity.

Lower electricity demand will reduce cash flows and add to the funding needs of Eskom Holdings SOC Ltd, Moody’s said.

South Africa lost its last investment grade assessment on 27 March, when Moody’s downgraded its foreign- and local-currency debt to Ba1.

The negative outlook on the assessment means that “a rating upgrade is unlikely in the near future,” said the ratings company in Thursday’s report.

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