Moody’s Investor Services has warned that the administration that takes power following South Africa’s 29 May general election will face a handful of long-standing structural issues that weigh on the country’s economic growth and creditworthiness.
Moody’s yesterday said these issues included stimulating years of sluggish economic growth, curbing chronic power shortages and reducing very high unemployment.
One of the major constraints on SA’s economic growth has been its persistently unreliable power supply, with frequent load shedding during the past decade.
The difficult operating environment has caused significant disruption, reduced business confidence and increased labour market uncertainty.
Moody’s vice president and senior credit officer, Aurelien Mali, said the current government has made incremental progress on these issues.
He said the extent and intensity of load shedding has decreased in the run-up to the election and Transnet was implementing a restructuring plan to reduce bottlenecks and strengthen its finances.
However, Mali said that depending on the election outcome —and ultimately the balance of power in the event of a coalition government — further progress could be difficult.
“Financial support to financially stressed state-owned enterprises — particularly Eskom, whose tariffs do not adequately finance the company’s operating and capital expenditures — also weighs on the government’s finances,” Mali said.
“Additionally, the rising level of debt that regional and local governments owe to public utilities such as Eskom and Rand Water is creating a financial burden for municipalities, potentially weakening their ability to deliver services effectively.”
Moody’s is expecting a modest acceleration in gross domestic product (GDP) to 1.3% this year and 1.6% in 2025, up from 0.6% in 2023, but still well below the emerging market average.
This is better than the 0.9% and 1.2% growth forecast for 2024 and 2025, respectively, by the International Monetary Fund.
Still, Mali said the government’s budget remained vulnerable to shocks, and fiscal space to implement reform remained limited.
“Another challenge for the government is South Africa’s high exposure to social risks, reflecting very high unemployment —more than 50% for the age 15-24 workforce — inflexible labour laws, a shortage of skilled workers for certain roles, and income inequality that is among the highest in the world,” he said.
“Close to 30% of the population lives with less than $5.50 (R100) per day. The country’s mortality rate is also high, and the homicide rate is among the highest in the world.”
This comes as polls indicate an array of possible election outcomes, the majority of which show the governing African National Congress (ANC) failing to win an outright majority and forced into forming a coalition with one or more minority groups.
Moody’s baseline scenario for the sovereign ratings envisions a continuation of prudent policies concerning the management of public finances.
However, Mali said the strength or otherwise of the new administration’s mandate could make the already complicated management of fiscal, economic and social policy objectives even more difficult.
“The election raises the possibility that policies from comparatively radical parties, including policies not friendly to investors, will emerge,” Mali said.
“Yet we believe the ANC will remain the dominant political force in South Africa, even within a ruling political coalition, which limits the risks of an abrupt shift from the current mix of economic and financial policies.”
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