By Lehlohonolo Lehana.
Fitch Ratings believes the revised revenue projections and the deficit for fiscal year 2024/25 are “optimistic” and says the National Treasury is likely to have to allocate more resources for state-owned companies (SOEs).
The US-based credit ratings firm on Monday said the SA government had not factored additional support it will have to give to SOEs into its debt forecasts, which is why the latest fiscal projections show smaller budget deficits than previously forecast.
Finance Minister Enoch Godongwana’s budget, which was tabled in parliament last week, projected that the consolidated deficit would reach 4.5% of GDP in this fiscal year and 3.7% in the next.
“We believe that the revised projections for revenue and the deficit for FY24 and FY25 are optimistic.
“When we affirmed South Africa’s rating at ‘BB-‘ with a Stable Outlook in January 2024, we projected that the fiscal deficit would reach 4.8% of GDP in FY24 and 4.6% in FY25.
“Moreover, the government is not budgeting for additional support to Transnet, a state-owned logistics firm, beyond the R7 billion guarantee granted in December 2023, but we estimate that further fiscal support may be required in the coming fiscal years to address the company’s entrenched operational and financial problems and contribute to its turnaround strategy.”
“In our previous review, we assumed this support would take the form of a debt transfer to the sovereign of R50 billion split between the next two years,” said Fitch.
Godongwana also announced that the government will tap into the Gold and Foreign Exchange Contingency Reserve Account to help pay spiralling government debt.
The account held at the Reserve Bank captures gains and losses on the country’s foreign currency reserve transactions.
The rating agency said while this will help to reduce gross debt, it doesn’t address underlying issues driving the government’s debt accumulation.
“Consequently, our own fiscal projections remain more conservative than the government’s, even considering transfers from an account held with the South African Reserve Bank.
“The authorities have said they will draw down some of the valuation gains in the government’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) at the SARB, up to R100 billion in FY24, and R25 billion in FY25 and FY26. This will reduce debt accumulation by about 2pp of GDP by end-FY26. The GFECRA, which captures valuation gains or losses on South Africa’s foreign-currency reserve transactions, held R507.3 billion in January 2024.
“Although gross debt will be lower than it would otherwise have been, all else equal, the impact on the sovereign credit profile will be limited as the move does not address underlying issues driving the government’s debt accumulation or the sovereign’s other main rating drivers, including South Africa’s low economic growth potential, persistent and large fiscal deficits, elevated public debt and exceptionally high levels of poverty and inequality,” the agency said.
In Fitch Ratings’ previous review, it expected gross debt/GDP to reach 83.2% in the 2025 financial year, although the GFECRA drawdown will lower this by around 2 percentage points.
“The authorities are still conducting consultations on a proposed new fiscal rule, but the budget indicated that a debt-stabilising primary surplus will anchor fiscal policy in the medium term, “Fitch Ratings says.