Moody’s says South African debt could surpass 50% of GDP

South Africa’s government debt could climb to more than 50 percent gross domestic product for the first time in more than a decade as weak economic expansion curbs tax revenue, according to Moody’s Investors Service.

Slow growth is “credit negative” and damped revenue “will make it challenging to maintain a sound fiscal position at the time when the government faces difficulties adhering to its spending ceiling,” Kristin Lindow, senior vice president at Moody’s, said in an e-mailed statement on Thursday. “In turn, a widening fiscal deficit combined with reduced growth will delay stabilizing and reversing the rising public debt/GDP trajectory.”

Africa’s most-industrialized economy risks falling into recession this year as plunging commodity prices, weak demand from China and the worst drought in more than a century crimp output. The weak expansion is the most prominent concern for rating companies as the nation risks losing its investment-grade status. The World Bank lowered its forecast for expansion this year to 0.8 percent, in line to the estimate from the nation’s central bank.

“The latest cuts in 2016 and 2017 growth will hamper investment, including in infrastructure and human capital, further lowering potential long-term growth,” Lindow said. “This is likely to contribute to prolonged high unemployment and worsening social tensions.”

Finance Minister Pravin Gordhan will seek to restore confidence in government policy in his budget speech on Feb. 24 after President Jacob Zuma unexpectedly replaced Nhlanhla Nene as finance minister with a little-known lawmaker and then reappointed Gordhan four days later to the post he held from 2009 to 2014. The cabinet shuffle sent the rand and bonds plunging.

“In past years, the government has met its fiscal targets, which nevertheless led to continued debt accumulation and reduced the effectiveness of counter-cyclical fiscal policy,” Lindow said. “Government credibility was also weakened by abrupt and multiple changes in the minister of finance position in December.”

Nene pledged in October to narrow the budget gap to 3 percent of GDP by the year through March 2019 from an estimated 3.8 percent this year and to keep gross debt to below 50 percent of GDP. The ratio was projected at 48.6 percent in the fiscal year starting in April 2016.

Moody’s cut the outlook on its Baa2 credit rating, the second-lowest investment grade, to negative in December. Standard & Poor’s, which rates the nation’s debt one level below Moody’s, also changed its outlook to negative, indicating it may downgrade the nation’s debt to junk.

The rand strengthened 0.7 percent to 15.8111 per dollar as of 5:10 p.m. in Johannesburg on Thursday, taking its decline since the start of December to 8.7 percent.

 – Bloomberg