Higher Debt Costs Cut South Africa Fiscal Room, Moody’s Says

JOHANNESBURG (Capital Markets in Africa) – The weaker rand and foreign-investment outflows from South Africa are raising the nation’s debt costs and reducing its fiscal flexibility, but its vulnerability to tightening financing conditions is still low, Moody’s Investors Service said.

The rand depreciated 14 percent against the dollar in the second quarter, the worst performance among major currencies after Brazil’s real, while portfolio outflows totaled about $6.4 billion, Moody’s said in an emailed report Tuesday, citing data from the Institute of International Finance. Yields on local-currency debt are close to 9 percent, a level was last seen in December, while the rate on 10-year dollar bonds has climbed 112 basis points to 5.82 percent.

“Although foreign-exchange reserves only roughly cover external debt due in the short term and may fall further as investors continue to adjust their portfolios globally, a large proportion of government and economy-wide external debt is in domestic currency implying that South Africa’s credit metrics are resilient to further weakening in the rand,” Moody’s said.

Business sentiment and the rand have wiped out all the gains that came on the back of President Cyril Ramaphosa’s ascent to power since December. Former President Jacob Zuma’s scandal-ridden tenure of almost nine years saw Africa’s most-industrialized economy lose the investment-grade status it held with S&P Global Ratings and Fitch Ratings Ltd. since 2000.

State Pledges
Moody’s affirmed the country’s debt scores at one level above junk in March and changed the outlook to stable from negative. In June, Fitch kept its assessment of South Africa at junk, saying weak economic growth, sizable government debt, and wide inequality are weighing down the reading. S&P also held its non-investment-grade ratings on local- and foreign-currency bonds in May. The economy hasn’t expanded at more than 2 percent a year since 2013.

Ramaphosa has pledged to tackle graft and has overhauled the boards of state-owned companies including the power utility and the ports and rail operator. This is part of an attempt to turn around the finances of these firms, which have become a drag on the national fiscus after years of mismanagement.

South Africa’s gross debt is projected to peak at 56.2 percent of gross domestic product in 2023 and the cost of servicing this is the third-fastest growing expense in the budget, according to the Treasury.

The long average maturity of the government debt, at about 13.4 years, slows the impact of a potentially sustained tightening in financing conditions on fiscal strength, Moody’s said.

“Nonetheless, a persistent and sustained rise in external borrowing costs would further reduce fiscal flexibility,” it said. “Higher debt-servicing costs would constrain the government’s capacity to consolidate public finances.”

Source:  Bloomberg Business News