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Moody’s warns of rising South Africa debt above 100%

South Africa’s government debt could rise by 40 percentage points over the next three years, as strong and widespread fiscal pressures and still weak economic growth weigh on the country’s credit profile, according to Moody’s Investors Service.

This would push government debt as a percentage of gross domestic product well above 100% and well above the peak of 87.4% that the Treasury is forecasting for 2023-24 under its active management scenario.

The increase in spending driven by a 500 billion rand ($ 29.6 billion) stimulus package to support the economy against the impact of the coronavirus pandemic will widen the budget deficit to 15.6% of GDP and debt will increase to 89.9% this fiscal year, Moody’s analysts led by Paris-based Lucie Villa said in a credit advisory released Thursday.

This is despite the government’s efforts to finance the package by redefining the spending priority and compares to the Treasury projection of 81.8%.

Africa’s most industrialized economy will shrink 6.5% this year due to the virus and strict lockdowns that halted almost all economic activity for five weeks from March 27, Moody’s said.

This compares to its previous forecast of a 2.5% contraction and the government’s projection of a 7.2% drop in production.

There is also a risk of “further tax leaks” from state-owned enterprises, as the virus restricts activity.

Falling demand for electricity will reduce cash flow and increase Eskom Holdings SOC Ltd’s financing needs, Moody’s said.

South Africa lost its last investment grade assessment on March 27, when Moody’s lowered its foreign currency and local currency debt to Ba1.

The negative outlook for the valuation means that “a rating hike is unlikely in the near future,” the rating company said in Thursday’s report.

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