By Lehlohonolo Lehana.
Ratings agency Fitch have issued a stern warning of South Africa’s deteriorating risk profile due to the impact of prolonged electricity cuts on the economy.
If South Africa fails to address the electricity cuts within the medium term, there could be downward pressure on the country’s credit rating, it said.
According to the rating agency, the recent announcement of a national state of disaster over the energy crisis by President Cyril Ramaphosa, shows that the energy crisis has continued to deteriorate.
And while it is possible for the state of disaster and the appointment of a minister of electricity to strengthen the government’s capacity to respond to the power shortage – the government’s generally poor track record on execution and Eskom governance problems will likely have the opposite effect, with Fitch suggesting that further delays are now possible.
Fitch Ratings is a global credit rating agency that provides credit ratings, research, and analytics to investors, issuers, and other market participants.
It is important for a country like South Africa to have a stronger credit rating because it can determine the country’s ability to access affordable credit, attract foreign investment, and maintain economic stability.
A positive credit rating can also signal confidence in the country’s financial management, potentially leading to improved business and consumer sentiment.
In November last year, the rating agency affirmed the ‘BB-‘ rating with a stable outlook – based on the assumption that the power shortage would slightly improve gradually into 2024.
Fitch said there is a little bit of headroom in the country’s ‘BB-‘ rating to absorb a temporary impact on economic metrics from load shedding, but continual decreases in growth expectations may negatively affect the country’s rating.
“The South African Reserve Bank (SARB) in January lowered its forecast for economic growth in 2023 to 0.3%, from 1.1% previously.”
“This partly reflected its revised estimate of 250 days of load-shedding in 2023, up from 100 previously, exerting a two percentage point drag on GDP growth in 2023, compared with an earlier estimate of 0.6 percentage points,” Fitch Ratings said.
Fitch estimated that the country’s low growth potential, at 1.2%, will remain a key credit weakness.
“The reserve bank expects load-shedding to decline but remain high in 2024 and 2025. The SARB now forecasts 150 days of load-shedding in 2024, up from 40 days previously, and it assumes 100 days in 2025,” added the agency.
Despite the power crisis being the most acute economic difficulty the country faces, other major challenges include growing problems at the state-owned freight and logistics company Transnet which is affecting the ability of mining companies to export bulk commodities.
The further deterioration of the electricity supply goes beyond the base case and presents downside risks for the country’s economic growth.
Should infrastructure problems cause a further decline in potential growth, that could eventually weigh on the sovereign rating, Fitch said.
There have been scheduled electricity outages on every day this year, after a record number of days with outages in 2022.
Moody’s rating agency also flagged risks from crippling power cuts , consumer sentiment and investment will weaken the country’s already subdued economic growth prospects and threaten social and political stability”.
“We expect the blackouts’ effect on businesses, consumer sentiment and investment will weaken the country’s already subdued economic growth prospects and threaten social and political stability… Given South Africa’s social inequities and high unemployment rates, social and political instability are likely to intensify, especially given the electricity regulator’s January decision to grant an increase in electricity prices of more than 18%, effective 1 April,” said Moody’s.
Moody’s currently has a stable outlook on SA, with a Ba2 rating, a notch higher than the Fitch and S&P equivalents.