While South Africa’s (Baa2 negative) government has consistently met its expenditure ceilings and is close to bringing the primary fiscal balance into surplus, low growth, revenue shortfalls and in some years the weakening rand are driving an increase in government debt to GDP ratios, Moody’s Investors Service said in a report today.

The report, “Government of South Africa FAQ on Fiscal Consolidation and Public Debt Trajectory”, is available on www.moodys.com. Moody’s subscribers can access this report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

READ: The implications of a credit ratings downgrade on S.A 

“South Africa has a record of sound fiscal management, especially on the spending side. The Treasury has consistently met spending ceilings introduced in 2012 and is aiming to reach primary balance in the next fiscal year” said Zuzana Brixiova, a Moody’s Vice President — Senior Analyst and co-author of the report. “However, the country’s debt-to-GDP ratio continues to accumulate steadily, albeit at a slowing rate.”

Delays to growth and a faster-than-projected rise in interest rates are among key risks to a stabilisation of the debt-to-GDP ratio by 2018/19.

Other risks include rising contingent liabilities related to government guarantees to state-owned enterprises and spending pressures in the run-up to the 2019 general election.

Implementing the fiscal consolidation targets set out in the 2016

Medium-Term Budget Policy Statement (MTBPS) – not just in nominal (rand) terms, but also in terms of stabilizing the debt-to-GDP ratio – will be key if South Africa is to preserve macroeconomic credibility and boost investor confidence. In Moody’s view, the government will stay within its expenditure ceilings, but meeting revenue targets will be challenging in the weak economic environment.

The negative outlook on South Africa’s Baa2 government bond rating reflects risks related to the implementation of structural reforms aimed at restoring confidence and encouraging investment, upon which Moody’s bases its expectations for a gradual growth recovery and debt stabilisation in coming years.

The negative outlook also recognizes the downside risks associated with political uncertainty and low business confidence as well as the challenging external environment characterized by low growth, investment and trade.

South Africa’s rating would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium term growth. Continued accumulation of public debt and contingent liabilities in terms of GDP would also put downward pressure on ratings.

Finally, political infighting impeding the government’s ability to implement key structural reforms and contributing to protracted low business confidence would also be negative.

While a rating upgrade is unlikely, Moody’s would change the outlook from negative to stable if the government would undertake structural reforms that would bring the economy on a path of higher and sustainable growth and stabilise the general government debt and contingent liabilities relative to GDP ratios. Boosting business confidence through reforms in the areas of labor markets, electricity, and state-owned enterprises would be credit positive.