JOHANNESBURG, April 24 (Reuters) - Ratings agency Moody’s cut its forecast for South Africa’s economy to a 6.5% contraction in fiscal 2020, saying the country’s 500 billion rand ($26.29 billion) rescue package will weaken its public finances and constrain government’s ability to provide support to state-owned firms.
Moody’s, which predicted on April 14 that South Africa’s GDP in the year ending March 31, 2021, would contract 2.5%, also said in a research report on Friday economic growth will recover by 4.5% in 2021.
President Cyril Ramaphosa announced the rescue package, equivalent to 10% of the GDP of Africa’s most industrialised nation, on Tuesday to try to cushion the economic blow of the coronavirus pandemic.
Ramaphosa said South Africa had approached global financial institutions like the World Bank, International Monetary Fund, the BRICS New Development Bank and the African Development Bank, primarily to fund healthcare interventions.
The rest of the package would be financed by a mix of 130 billion rand of reprioritised spending and other local sources.
“The package is key to helping the country’s weakest households and enterprises to weather a period of lower revenue inflows amid the domestic lockdown and slowdown in global trade,” Moody’s said.
“However, the support measures are unlikely to prevent a sharp economic contraction this year.”
With the impact of the weak economy on revenue, the ratings agency now expects the government to record a budget deficit of 13.5% of GDP in fiscal year 2020, up from an estimated 8.5% last Tuesday.
The sharp widening in deficit will push the country’s debt burden up 15 percentage points, to 84% of GDP by the end of fiscal 2020, it said.
“The fiscal pressures associated with the economic downturn and support package reduce the space the government has available to provide further support to SOEs. While the initial fiscal impact for the government is neutral, the scheme will increase the government’s contingent liability risks,” it said.
Several state-owned firms, like power utility Eskom and South African Airways, are facing financial difficulties and piling pressure on Ramaphosa’s cash-strapped government. ($1 = 19.0213 rand) (Reporting by Nqobile Dludla; Editing by Sandra Maler and Sonya Hepinstall)