Fitch predicts another R50 billion Transnet bailout

Rating agency Fitch predicts that Transnet could receive another R50 billion in government support over the next two years as the utility continues to hamper the country’s economic growth.

Fitch recently affirmed South Africa’s long-term foreign-currency issuer default rating at BB- with a stable outlook.

Among the factors holding South Africa back from a better rating, the agency highlighted the country’s struggling logistics sector.

“Financial, operational and governance weaknesses at Transnet, the logistics SOE, disrupted supply chains in 2023, with significant delays at ports and decreased rail freight volumes,” the agency said. 

To address Transnet’s immediate liquidity constraints and support its recovery plan, the government granted a R47 billion guarantee facility in December 2023. Transnet’s total debt amounts to R130 billion.

However, Fitch said Transnet plans to announce a five-year strategic plan by March 2024, “and we assess that fiscal support, through either capital injections or debt transfer, is likely given the importance of Transnet in the South African economy”.

“We have assumed R50 billion below-the-line support in our debt projections, split between the fiscal year ending in March 2025 and FY25.”

The agency added that the opening of Transnet’s infrastructure to third-party freight operators in the second quarter of 2024 would help improve the performance of the logistics sector.

Bank of America senior economist Tatonga Rusike recently said another Trasnent bailout, on top of the R47 billion pledged by the National Treasury last year, is inevitable as the government will not allow the utility to fail. 

He also highlighted government support for Eskom, Transnet, and a permanent social relief of distress grant as major fiscal risks for South Africa. 

The government’s debt burden is steadily growing, with the Treasury forecasting at the end of last year that gross debt as a percentage of GDP would peak at 77.7% in 2025/26 – up from a forecast of 73.6% in February 2023.

Much of this growth is expected to come from the government taking on more and more debt from the country’s ailing state-owned enterprises.

Fitch expects similar figures, projecting general government debt to reach 83.2% of GDP in the 2025 financial year, from an estimated 76% in FY23. This is well above the anticipated 2023 “BB median” of 52.2%. 

Fitch said government debt will increase due to a primary surplus below its debt-stabilising level, weak growth and large stock-flow adjustments driven by the revaluation of inflation-linked bonds, foreign-currency-denominated debt, discount on loan transactions, debt transfers from Eskom and the assumed debt transfer from Transnet. 

While government debt is a concern, Fitch said South Africa’s ratings are supported by a favourable debt structure with long maturities and mostly local-currency-denominated, strong institutions, and a credible monetary policy framework. 

However, it said a further significant increase in government debt-to-GDP – for example, due to persistent large fiscal deficits or the materialisation of large-scale contingent liabilities – could see South Africa’s rating be downgraded.