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Eskom debt transfer, grants, and the 2024 election keep S&P cautious on SA

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Standard & Poor’s may have issued a positive outlook on South Africa when reaffirming its credit rating two weeks ago, but the government’s decision to take over some of Eskom’s debt, along with swelling civil servant and social welfare bills, pose credit risks.

The US credit rating agency on 18 November affirmed South Africa’s ‘BB-/B’ long- and short-term foreign currency, and ‘BB/B’ long- and short-term local currency sovereign credit ratings, keeping its outlook positive.

It said although threats linger, higher-than-expected tax revenue – seen to reduce South Africa’s fiscal deficit – contributed to the positive outlook

During the October mini-budget, Finance Minister Enoch Godongwana announced the government’s commitment to take over a portion of Eskom’s debt, which currently sits at R400 billion. As much as R266 billion of Eskom’s debt will be taken over by the government, Godongwana said.

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The agency is now watching to see how the debt transfer will impact South Africa’s fiscal position. The country’s debt and fiscal assessments were already weak without Eskom’s debt. Should it significantly weigh on the country’s fiscal trajectory, the outlook could be revised to the downside, S&P said on Wednesday, delivering its credit outlook for 2023.

“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 cautioned that Eskom may not be able to resolve all its financial and operational struggles and may require additional government support.

“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 careful tone extends to the civil servants’ wage bill, which is facing pressure from unions who are demanding double-digit salary increases, as well as social pressure that could lead to fiscal risk from the ANC’s December elective conference and 2024 general elections.

‘Running out of money’

Wits Business School Professor Jannie Rossouw said South Africa’s entire fiscal position is at risk and that its affordability levels have largely waned.

“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 added that South Africa faces the additional risks of a lack of leadership, adding that parliament has lost its ability to exercise its oversight functions over the government.

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