Fitch warns SA could face further downgrades in response to energy crisis

Credit rating agency Fitch has warned South Africa that a failure to address the country’s electricity crisis over the medium term could add downward pressure on its current rating of the country.

The rating currently stands at BB minus.

Fitch notes President Cyril Ramaphosa’s interventions announced at the State of the Nation Address – these include the planned appointment of an Electricity Minister as well as the declaration of a national state of disaster around the energy crisis.

It says this could strengthen the government’s capacity to better deal with the crisis. However, it also points out that a generally poor track record on the execution of plans, including Eskom’s past governance issues, as well as the imminent departure of current chief executive Andre de Ruyter, suggests those problems may not be resolved as quickly as hoped.

The rating agency also warns that the current electricity crisis could reduce its forecast view of the economy growing at 1.1%, which it worries may undermine the government’s fiscal consolidation efforts.

The government is expected to take on a portion of Eskom’s R400 billion debt, which in this year’s budget speech could increase the national debt to GDP above 75%.

A rating downgrade would make borrowing even more expensive for the country and the government may have to raise taxes to meet debt servicing costs.

Managing Director at Credit Ratings Analytics, Saveshan Pillay says, “I don’t think that it would cause an immediate rating change but unfortunately it does set the country back in terms of reclaiming our existing investment grade ratings. These power cuts have an enormous impact on the economy.”

Pillay adds, “I think the South African Reserve Bank (SARB) estimates between stages 3 and stages 6, it’s between R200 million and R900 million a day. So, that is quite substantial. It definitely would impact the medium-term credit outlook for the country due to the knock-on affects the ongoing power outages would have on the economy.”