S&P Global Ratings has flagged rising government guaranteed debt and contingent liabilities as a risk to South Africa’s sovereign credit rating.
“We are referring to the risk that the central government could assume the responsibilities of weaker state-owned enterprises – weaker, in terms of financial performances or other measures,” Gardner Rusike, associate director for sovereign and international public finance ratings at S&P said at credit conference in Johannesburg.
Data from the ratings agency shows that government guaranteed debt as a percentage of GDP stands at 48.39% in the 2017 budget while utilised guarantees comprise 7.54% of GDP.
According to Rusike, Eskom presents a particular challenge as the utilisation of guarantees by the power utility has grown at a faster pace than what National Treasury expected.
His presentation showed that the 2016 budget assumed that Eskom’s contingent liabilities would total R190 billion in 2016, rising to R205 billion in 2017. However, the 2017 budget showed Eskom’s contingent liabilities at R218 billion in 2016 with R243 billion expected in 2017.
S&P lowered Eskom’s corporate credit rating by one notch to BB in November 2016. It also maintained a negative outlook on the state-owned enterprise (SOE), partly due to increased financial pressure as a result of an uncertain tariff path.
Although the risk of rising contingent liabilities remains limited at this stage, it could hurt government’s balance sheet further down the line.
Government’s assuming the contingent liabilities of SOEs have in the past led to sovereign ratings downgrades in Iceland during the country’s banking crisis and in Mozambique in 2016.
The rating agency also restated its concern around weak economic growth in South Africa.
“South Africa’s growth performance between 2000 and 2015 has been disappointing compared to other markets with a comparable GDP per capita. That is a concern that needs to be addressed,” said S&P’s chief EMEA economist Jean-Michel Six.
Higher GDP growth and improving fiscal dynamics, spurred by the implementation of policy that would improve business confidence and private sector investment, could potentially lead to the sovereign maintaining its investment grade rating and S&P revising its negative outlook to stable.
S&P again called for the implantation of growth-enhancing policies while raising concern about political interference, which may weaken institutions and could affect the rollout of policies and the sovereign rating.
“If we see increasing political tensions, infighting at state institutions and [among] political leadership, which can derail the government’s plan to boost growth, that could impact on our forecast for growth and the way we view institutions in executing their mandate,” Rusike said.
S&P is due to review the sovereign rating mid-year.