In a recent setback in South Africa’s efforts to withdraw from investment grade, ratings agency S&P Global revised the country’s outlook from positive to stable on Wednesday. This is because the country’s energy crisis continues to weigh on economic growth.
Less than a year ago, in May 2022, S&P raised South Africa’s outlook to positive, citing the country’s improved fiscal trajectory as well as the government’s structural reform efforts.
But South Africa’s economic situation has deteriorated significantly since then, with the failure of Eskom representing a significant risk to growth, which has also been dampened by the ratcheting up of interest rates. Tighter monetary conditions have also added to the rand’s weakness, which has seen the local currency breach R18.50 to the dollar this week.
According to S&P, South Africa’s economic growth is under increasing pressure due to infrastructure constraints, especially electricity shortages. In addition, reforms to address the country’s infrastructure problems and improve governance and performance in state-owned enterprises have been slow, also weighing on growth.
In response to the ratings action, the treasury notes that the government is taking important steps to reduce the burden in the short term and transform the energy sector through market reforms.
Last month, Finance Minister Enoch Godongwana announced in his budget speech that the government had proposed a R254 billion debt relief plan for Eskom.
The debt takeover – which comes with a number of conditions, including limiting Eskom’s ability to invest in power generation – is expected to free up the utility’s balance sheet to return to financial stability. Eskom has amassed more than R400 billion in debt, which has reduced its ability to keep its aging coal fleet, for 15 years of load shedding.
The Treasury said other reforms were underway to improve performance in the transport sector, particularly freight rail. “In addition, fiscal consolidation measures have provided public finances to absorb part of Eskom’s debt, maintain support for the economy and the most vulnerable, and create additional budgets to fight crime and corruption.”
Data released this week gave us confidence that South Africa could be headed for another technical recession. The country’s economic growth contracted by a deeper-than-expected 1.3% in the final months of 2023, possibly as a result of heavy load shedding during the quarter.
In January, the South African Reserve Bank gave a forecast on the economic health of the country affected by the energy crisis, forecasting GDP growth of only 0.3% in 2023. growth this year.
The Reserve Bank’s medium-term expectations are not much better, with the economy forecast to grow by 0.7% in 2024 (down from 1.4%) and 1% in 2025 (down from 1.5%).
The Treasury is slightly more bullish on growth, forecasting in the budget that GDP will expand by a still-meagre 1.4% over the medium term. According to treasury forecasts, South Africa’s economy is expected to grow by 0.9% in 2023 and will recover slowly to 1.8% in 2025.
“This rate of economic expansion,” the budget notes, “is less than the pace needed to generate significant employment and support national development.”