SA’s debt surge must stop – Moody’s

Fresh on the heels of the South African elections, rating agency Moody’s says the country’s long-term growth outlook is weak and one of the main challenges of the new government will be to stop and reverse the country’s rising debt.

In its latest research report, the rating agency said the government needs to urgently put in place effective policy changes in order to tackle the country’s low-growth challenges, rising debt and weak state enterprises and institutions.

“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 analyst and the report’s co-author.

South Africa’s foreign debt is rated Baa3 by Moody’s, which is just shy of junk status with a stable outlook. Moody’s is the only major rating agency that has not downgraded SA’s foreign debt to junk.

“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,” Villa added.

But even with the momentum from policy reforms, Moody’s expects South Africa’s gross domestic product (GDP) growth to remain one of the lowest amongst the Baa3 countries rated the agency.


The state’s debt burden is expected to rise by 65% of GDP by 2023; this could be pushed over 70% when you include guarantees to embattled power producer Eskom.  

Moody’s notes that this is a trend that contrasts with South Africa’s Baa3 peers. “Highly leveraged state-owned enterprises, including Eskom, remain a source of risk for South Africa’s fiscal strength.”

“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,” said Villa.

No immediate fixes

While it’s expected that President Cyril Ramaphosa – the bearer of a ‘new dawn’ – and the government will now aggressively pursue the cleanup campaign against corruption and state capture, as well as implement policy reforms Moody’s said the socio-economic environment will delay and constrain the impact of wider structural reforms.

“A polarised society with inequalities along income, professional categories, races, rural/urban population, makes deep reforms difficult. A reform will often be perceived as greatly favouring one category to the detriment of another,” said Villa.

Reforms to South Africa’s labour markets will face opposition from the country’s unions and other interested groups.

Even in the event of such reforms, the results will not happen overnight, with Moody’s stating that it does not expect a “significant acceleration in employment in the foreseeable future”. This week, Statistics SA announced that the country’s unemployment rate increased to 27,6% in the first quarter of 2019. In 2018, Moody’s says only 29% of the population of South Africa was employed, “the lowest level among Baa2-Ba rated [emerging markets].”

However, despite a weak long-term outlook and eroding fiscal profile, Villa said the country’s debt composition and economy provided “credit strengths that bolster the sovereign’s resilience to shocks and support the sovereign’s Baa3 rating.”

“South Africa’s large pool of domestic investors and the maturity and currency structure of its debt, mitigate government liquidity risks,” said Villa.

She added that among the country’s strengths is a diversified economy with sound policies. In addition, South Africa’s floating exchange rate and debt, which is primarily in rands, will be able to insulate it from shocks.

“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,” said Villa.