South Africa: Debt Burden Will Rise Again (Moody’s and Fitch)

Despite the South African authorities’ attempt to consolidate public finances to contain debt, Moody’s and Fitch remain skeptical. In a press release on Monday, March 1, the two financial rating agencies maintain that South Africa’s debt will bear an increasingly heavy burden.

The South African government, in drawing up its 2021 budget, has made adjustments to not only reduce the budget deficit, but also to deal with debt which reached 55.6% of GDP in 2019. However, Moody’s has indicated that these adjustments are modest and will not prevent the burden of public debt from increasing over the next three years.

For the fiscal year ended March 31, 2021 (FY2020), the government now expects to record a consolidated budget deficit of 14% of GDP, down from its October forecast of 15.7%. The main driver is an 11% drop in revenue that is less severe than the 16% forecast in October, although this still means a year-over-year revenue loss of around two percentage points of GDP.

For its part, Fitch’s agency is in tune with Moody’s, remaining skeptical about South African debt. She notes that public debt will continue to increase over the medium term, posing downside risks that are reflected in the negative outlook on the sovereign’s “BB-” rating.

The authorities, the agency said, plan to juggle to cut some spending. But, Fitch continues, these measures will be ineffective and will not prevent the budget deficit from widening. “We continue to believe cuts of this magnitude will be difficult to achieve and to maintain more conservative assumptions than the government on the pace of fiscal consolidation,” said Fitch

As a reminder, the main financial rating agencies (Moody’s, Fitch and S&P) downgraded South Africa’s rating in April 2020. They justified their choice by citing two main reasons: the consequences of the pandemic and the structural weaknesses of the economy.

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