A failure by South Africa to lower public debt risks triggering credit downgrades deeper into sub-investment, Fitch said on Wednesday.
Debt in Africa’s most industrialised economy is set to reach 80% of the gross domestic product next year as the government borrows more to bring the coronavirus pandemic under control.
Fitch downgraded South Africa’s credit rating in April, citing the lack of a clear path towards debt stabilisation and higher economic growth.
The other top ratings firms, Moody’s and S&P, also rate the country at sub-investment grades.
“A continued rise in government debt/GDP and failure to formulate a clear and credible path towards stabilising the government debt/GDP ratio could lead to a further downgrade in South Africa’s ‘BB’ rating, which is on Negative Outlook,” said Jan Friederich, Fitch’s head of Africa sovereign ratings.
Finance Minister Tito Mboweni said in an emergency budget in June the Treasury would stick to its promise of some $13.5 billion of spending cuts in the short term, a target set in February before the COVID-19 pandemic.
“Social and political factors, including exceptionally high inequality, powerful trade unions, and deep divisions within the governing African National Congress, present significant hurdles to fiscal consolidation,” Friederich said in a research report.
Economic downturn
The pandemic has had a profound impact on South Africa. The economy is expected to contract by 7.2% this year.
All economic sectors in the country have experienced a sharp downturn and small businesses in particular face extreme pressure.
Millions of jobs are at risk – and millions of households are experiencing increased hardship. Tax revenue projections are down sharply.
Moreover, the epidemiological path and economic consequences of the pandemic are both highly uncertain and evolving rapidly, necessitating rapid adjustments in policy and forecasts.
Over the past three months, the South African government has prioritised public health to save lives. It also took the difficult step of severely restricting economic activity at a time when GDP growth was already weak.
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