Govt assures Fitch measures in place to reduce load shedding in 2024

Treasury was reacting to the latest pronouncement by international credit rating agency Fitch that maintains its BB-credit rating for South Africa, keeping the long-term foreign and local currency debt ratings on stable.

 

Fitch Ratings affirmed South Africa's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

 

"We forecast real GDP growth will accelerate to 0.9% in 2024 and 1.3% in 2025, from an estimated 0.5% in 2023," the agency said.

 

"The economy remains severely troubled by the impact of electricity capacity constraints, a struggling logistics sector and a high level of inequality. Further incremental progress on the 35 priority reforms identified by the government under Operation Vulindlela, launched in 2020, was recorded in 2H23, mainly in the energy and logistics sectors.

 

"Although the reforms will contribute to a modest increase in real GDP growth in the near to medium term, they are limited in ambition and we do not think they will significantly enhance South Africa's low growth potential, which we estimate at 1.2%.

 

"Fitch estimates that load-shedding will reduce in intensity in 2024 and 2025 compared with 2023, but not disappear. The peak of load shedding declined from 6.7 GW in May 2023 to 3.5 GW in December 2023.

 

"The return to the grid of three units of Kusile power station since September 2023, and the synchronisation of unit 5 in December 2023 add a total 3.2 GW to generation capacity. Further capacity is expected to come from private-sector investments, with a pipeline of confirmed projects representing 12GW of new capacity."

 

Responding to the statement, Treasury stated that more capacity is expected to come from private sector investments to assist in reducing loadshedding in 2024.

 

"Over the medium term, government will focus on raising GDP growth by improving the provision of electricity, logistics and enhancing the delivery of infrastructure. Fiscal policy continues to support this approach by stabilising debt and debt-service costs.

 

"Government reiterates that fiscal consolidation will be implemented through spending reductions, efficiency measures across government and moderate tax revenue measures."

 

However, the US rating agency also warned that the legal separation of Eskom into three divisions, intended to further catalyse investment in generation and transmission, is moving slowly and full separation before 2025 is not expected.

 

"Financial, operational and governance weaknesses at Transnet, the logistics SOE, disrupted supply chains in 2023, with significant delays at ports and decreased rail freight volumes. To address its immediate liquidity constraints and support its recovery plan, the government granted a ZAR47 billion (0.7% of GDP) guarantee facility in December 2023.

 

"Transnet plans to announce a five-year strategic plan by March 2024, and we assess that fiscal support, through either capital injections or debt transfer, is likely given the importance of Transnet in the South African economy.

 

"We have assumed ZAR50 billion below-the-line support in our debt projections, split between the fiscal year ending in March 2025 (Fitch-defined FY24) and FY25. The opening of Transnet's infrastructure to third-party freight operators in 2Q24 would help improve the performance of the logistics sector."

 

Fitch added that the agency forecasted a widening of the consolidated fiscal deficit to 4.7% of GDP in FY23, from 3.7% in FY22.

 

"This will be driven by an erosion of revenue collection hampered by low real GDP growth and low corporate profitability, upward expenditure pressure stemming from the public-service agreement that was signed after the budget was released and interest payments with the interest-to-revenue ratio gradually increasing to 20.9% in FY25, from 16.7% in FY22.

 

"The consolidated budget deficit will remain substantial at 4.8% of GDP in FY24 and 4.6% in FY25, reflecting further payroll increases and high social spending partially offset by higher revenue growth. Fiscal flexibility will reduce with a growing share of expenditure going to the wage bill and interest payments, from 46% in FY21 to an estimated 49% in FY25.

 

"The continuation of social spending beyond the end of the social relief of distress programme, which was due to expire in March 2024, was confirmed in November 2023. This is in line with Fitch's previous assumptions.

 

" We expect general government debt to reach 83.2% of GDP in FY25, from an estimated 76% in FY23, well above the anticipated 2023 'BB median' of 52.2% 'BB'. Government debt will increase due to a primary surplus below its debt-stabilising level, weak growth and large stock-flow adjustments driven by the revaluation of inflation-linked bonds, foreign-currency denominated debt, discount on loan transactions, debt transfers from Eskom and the assumed debt transfer from Transnet. Total Transnet debt amounts to ZAR130 billion."

 

To contain debt accumulation, the Treasury said plans to present a new fiscal anchor in the 2024 fiscal bill will be presented in February 2024.

 

Finance Minister Enoch Godongwana is expected to deliver his Budget Speech in Parliament on Wednesday, 21 February 2024.