Fitch on SA Budget: Eskom support has limited effect on SA's credit rating

2019-02-22 09:23 - Lameez Omarjee, Fin24
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Fitch Ratings has said that the additional financial support to Eskom has a limited effect on the country's credit profile, as large contingent liabilities are already accounted for in the credit rating.

The ratings agency which has rated SA at sub-investment grade at BB+ with a stable outlook, issued a report on the National Budget on Thursday.

"Efforts to contain the impact on the budget deficit by raising taxes and cutting wage expenditure three months before a parliamentary election show the government's commitment to fiscal sustainability," Fitch said.

However, the upward trajectory of government debt over the medium term – is still a risk to the country's rating. Treasury projects debt to stabilise at 60.2% of GDP by 2023/24, from 55.6% of GDP in the 2018/19 fiscal year.

Fitch said this reflects the "constraints on fiscal consolidation from low growth, support needs by state-owned enterprises, powerful trades unions and strong social pressures".

"Sizeable government debt and contingent liabilities are important sovereign rating weaknesses for South Africa, and failure to stabilise the debt/GDP ratio over the medium term is one of our negative rating sensitivities," Fitch said.

Eskom restructure

Government has set aside R23bn for Eskom for the next three years, with the condition that it supports its restructure. Eskom is being split into three entities - generation, transmission and distribution.

The transmission company will be established first and its board is expected to be appointed by mid-2019.

"The country's dependence on Eskom for electricity generation mean the government would likely support Eskom even if re-structuring does not proceed as planned," Fitch noted.

Eskom's high debt and SA's large contingent liabilities are a risk to public finances. Failure to implement the turnaround plan at Eskom to stem annual losses and which will limit the future growth of contingent liabilities, would add downward pressure on sovereign ratings, Fitch warned.

Fitch also commented on the May general elections – indicating the development of fiscal policy with the run-up to the national elections a consideration of its ratings assessment.

"The ratings are supported by strong institutions, a favourable government debt structure, deep local capital markets and a healthy banking sector," Fitch concluded.

'We will await further clarity' - S&P

Rival ratings agency S&P, which has also assessed SA's sovereign debt at below investment grade, said in a short comment on Thursday that it is considering the Budget implications for its ratings on Eskom.

The power utility has a rating of CCC+ from S&P. This is the seventh rung of non-investment grade. 

S&P noted that the format and timing of the state's R69bn three-year support package had yet to be released.  

"We will await further clarity on the support package and tariffs," it said.