SA ‘too weak for nuclear project’

R1 trillion-plus cost will sink SA into irreversible debt spiral, a financial analyst says.

Embarking on the R1 trillion-plus nuclear-build programme will leave the economy and the country in an irreversible debt spiral, an analyst says.

Anuclear-build programme cannot be implemented in a fiscally-responsible way in the current economic growth environment, an analyst warns.

“Nuclear does not work in the current growth environment. It blows our metrics out further away from the emerging market investment grade average of [a] 50% [debt-to-GDP ratio],” Nishan Maharaj, head of fixed interest at Coronation, says.

Fiscal consolidation

If the nuclear programme is implemented, fiscal consolidation will not become a reality, he adds. “In the current environment of 1% to 1.5% growth, this is not going to materialise. If you are going to implement it [nuclear], or lean towards implementing it, it is going to result in us moving further and further away from investment-grade status.”

This is one of the key reasons why rating agencies reacted as aggressively as they did after the cabinet reshuffle, he says.

S&P Global Ratings lowered South Africa’s sovereign credit rating to junk in April, but kept the local currency rating one notch above sub-investment grade. Fitch downgraded the country’s local and foreign currency rating to sub-investment grade.

This was after President Jacob Zuma removed finance minister Pravin Gordhan in a Cabinet reshuffle. The decision raised fears that SA would digress from its path of fiscal consolidation and forge ahead with an expensive nuclear-build programme, decisions that could see the country plunge into a downgrade spiral. On April 26, the Western Cape High Court ruled that government’s nuclear plans were invalid.

Maharaj says although inflation is moderating and growth accelerating, the deterioration of SA’s debt and fiscal metrics still pose considerable risk in the long term. Although expectations are that GDP growth will accelerate to 0.9% this year from 0.3% in 2016, the low-growth scenario and the fact that many state-owned enterprises – notably Eskom and SAA – still require additional support, will result in further deterioration of the country’s debt-to-GDP numbers, he says.

Maharaj says several bond indices in which SA is included require an investment grade rating on the local currency rating.

Following Fitch’s decision to downgrade SA’s local currency rating to sub-investment grade, the country will be excluded from the JP Morgan Investment Grade Index, triggering around $1 billion of outflows. If either S&P or Moody’s moves South Africa’s local currency rating to sub-investment grade, it will trigger an exit from the Barclays Global Aggregate Index and outflows of around $3 billion to $4 billion.

Moody's hair trigger

If both S&P and Moody’s adjust the local currency rating to sub-investment grade it will trigger an exclusion from the Citi World Government Bond Index and outflows of between $6 billion to $9 billion. A “worst-case scenario” will result in outflows of between $10 billion to $13 billion from the local bond market.