Mfuneko Toyana, JOHANNESBURG – REUTERS
30 October 2018
South Africa’s sovereign rating risked being downgraded due to concerns about the postponement of fiscal consolidation and lack of clarity around land expropriation, a senior S&P Global Ratings analyst said on Tuesday.
Recession-hit South Africa last week unveiled a bleak budget that saw wider budget deficits and low growth. South Africa is rated “junk” by S&P Global Ratings and Fitch.
“It is on those two aspects we would consider lowering the rating,” Ravi Bhatia, Director, Sovereign Ratings at S&P, said, referring to land reforms and fiscal consolidation.
The next rating review by S&P would be on Nov. 23, he said.
Bhatia said fiscal consolidation had been postponed in the Medium Term Budget Policy Statement (MTBPS) presented by new Finance Minister Tito Mboweni on Wednesday last week.
“This has been a trend for many years. That the deficits in the MTBPS are being revised upwards … that feeds into the debt stock where you see it rising towards 60 percent with no clear stabilisation,” he said.
“And if you look at interest payments as a percentage of revenues, they’re above 10 percent, and whether they’ll go above our thresholds of 15 percent is something to watch.”
Bhatia also said “sentiment has been dampened by the lack of clarity in the land expropriation.”
South Africa’s ruling African National Congress (ANC) has said it aims to change the constitution to allow for land expropriation without compensation to address racial disparities in land ownership that persist more than two decades after apartheid’s demise in 1994.
President Cyril Ramaphosa has said the policy will be undertaken in a way that does not threaten food security or economic growth. The ANC has said unused land will be the main target. However, the policy has still unnerved investors worried about the impact on property rights.
Denel has confirmed that Government has extended its R2.43 billion guarantee to R3.43 billion until 2023, giving it room to restructure and fix its ‘economic challenges’.
Denel on 29 October said that “the Government guarantee of R2.43 billion has been further extended to R3.43 billion over a five-year period ending in September 2023. The debt portfolio consists of government guaranteed commercial paper totalling R2.864 billion, with an unsecured note of R290 million.”
The company made the announcement in response to queries following the Medium Term Budget Policy Statement on 24 October, when National Treasury said Denel had used R2.8 billion of its R3.4 billion government guarantee.
Last week Treasury cautioned that “Denel will struggle to settle maturing debt on its own because its financial position remains weak. While it implements a turnaround plan, Denel will also contemplate the sale of non-core assets to improve its liquidity position.”
Denel yesterday said “We remain confident that an appropriate resolution within the context of the current economic challenges facing the national fiscus, will be found; and may include selling non-core assets, exiting non-core businesses, divesting from non-viable core businesses and ultimately repositioning our core businesses for long-term commercial sustainability.” Such possibilities are under discussion but subject to Board ratification and applicable PFMA (Public Finance Management Act) provisions.
Denel said it continues to work closely with its shareholder representative, the Department of Public Enterprises and the National Treasury among key state institutions, to find a sustainable funding solution. “The Board continues to support Denel in restoring the confidence of key stakeholders, including financial markets, in the company and the current leadership.”
It added that salaries have been paid in full to all employees for October and the company “will always strive to ensure that such obligations, including paying creditors, are to the best of management’s abilities fulfilled –something that the current liquidity challenge obviously makes difficult.”
