South Africa faces weak long-term growth outlook and rising debt, credit profile resilient to shocks, Moody's report
South Africa's new government faces significant challenges in raising growth, stabilizing debt, and strengthening State-Owned Enterprises and institutions, Moody's Investors Service said in a report.
"While South Africa has strengths, including a favourable government debt structure and a large pool of domestic investors, in the absence of effective policy change, the sovereign's credit profile will most likely continue to erode, with fiscal strength weakening and growth remaining low", said Lucie Villa, a Moody's Vice President - Senior Credit Officer and the report's co-author. "Fading prospects of policies that will sustain fiscal and economic strength, alongside any signs of diminishing resilience to shocks, would put downward pressure on the country's rating."
One of the main challenges of the new government will be to arrest and potentially reverse the long-term decline in South Africa's growth potential. Given the difficulty of the task, Moody's expects that structurally low growth will continue to weigh on the country's economic strength in the next few years.
Against the backdrop of a low growth environment, the new administration will face the challenging task of arresting and ultimately reversing the rising debt trend. Its ability to do so, through some combination of higher growth and lower deficits, will determine the evolution of South Africa's credit profile and rating over the coming years.
In seeking to arrest the rise in indebtedness, the government will need to overcome spending pressures relating to interest and wages, together with obstacles to raising further revenues including from the diminishment of SARS' capacity under the Zuma administration. However, without policy measures that bring the deficit down from its recent levels of 4.5%-5.0% of GDP, the debt-to-GDP ratio will likely rise above 70% (including Eskom guarantees) over the next few years, higher still in a downside scenario involving yet weaker growth, wider fiscal deficit, tighter financing conditions.
Although its long-term growth outlook remains weak and its fiscal metrics are eroding, South Africa's economy and debt composition provide a number of credit strengths that bolster the sovereign's resilience to shocks and support the sovereign's Baa3 rating. Signs that this resilience has diminished, making the sovereign more vulnerable to a sudden shift in financing conditions for instance, would weaken the credit profile.