Fitch maintains South Africa’s ratings, while S&P hikes Eskom’s outlook

The US credit rating agency Fitch has maintained its view on South Africa, while S&P boosted its outlook on Eskom from “negative” to “stable”. This is as a result of an expected transfer of some of Eskom’s debt to government.

Fitch said South Africa’s finances are constrained by high and still rising government debt, weak growth and high inequality.  But it also has a “favourable” government debt structure, which is mostly in rand (not foreign currencies) and with long maturities. In addition, the country has a “credible” monetary policy framework.

The agency noted “substantial recent over-performance on fiscal revenues and the government’s strong efforts to control expenditure”, which if successfully continued, could bring about debt stabilisation.

“However, at this stage we assume a substantial part of recent higher revenues to be temporary and see current public sector wage negotiations pointing to increased upward pressure on spending.”

Fitch doesn’t expect load shedding will significantly improve next year and will ease only gradually in 2024.

South Africa’s growth potential remains low and is a key credit weakness, Fitch said.

“There recently has been more progress on the government’s reform agenda pushed by a focus on process bottlenecks under Operation Vulindlela, but full implementation still takes a long time and reforms on the agenda are limited in ambition. There is also a risk that measures to improve transport infrastructure, a key part of the agenda, are merely offsetting an underlying deterioration, as worsening capacity issues amid rising demand have held back mining exports this year.”

Tax revenue has been surprisingly high, but Fitch expects it to fall back as profits in the mining sector normalise.

Fitch kept South Africa’s long-term rating at ‘BB-‘ with a “stable” outlook.

Also, on Friday, US ratings agency S&P hiked its outlook on Eskom from “negative” to “stable”, keeping its rating at “CCC+”.

It noted that Eskom’s operating performance is deteriorating and its costs are rising, with billions spent on diesel for emergency power generation. Fitch says there are signs that load shedding could increase in coming months. However, government’s plan to take on between one- and two-thirds of Eskom’s debt would help stabilise its finances.

It warned, however, that the debt transfer plan is complex and not without risks.

In addition, the transfer won’t address Eskom’s other challenges, such as weak operational performance, overdue receivables from municipalities, and below-cost tariff increases. Eskom’s cash flow will depend on its new tariffs for next year, which will be granted by the regulator, Nersa, next month.

Eskom asked for a 33% increase in its tariffs.

“(We) believe a full tariff award would be unaffordable for many customers, and either lead to lower sales volumes or a rise in bad debts,” S&P said.

S&P says it would lower its rating if bondholders receive less value than the original promise under the debt transfer plan.

A week ago, S&P kept South Africa’s credit ratings unchanged. Its outlook remains “positive”, meaning the next step could potentially be an upgrade.

Source: news 24, South Africa