Mboweni out of time already

Judging by the reaction in currency and bond markets on Thursday, it would seem that finance minister Tito Mboweni’s medium-term budget policy statement failed to allay fears that the country is on its way to another damaging credit downgrade.

Although Mboweni, who in his 10 years as governor of the SA Reserve Bank had to deal with more than a few episodes of rand volatility, will not be alarmed by two days of currency moves, the rand’s 1.8% decline against the dollar is cause for concern.

The immediate implication is that markets are not convinced that the government is committed to the type of discipline needed to get the fiscal position on a sustainable path. Moody’s Investors Service, the last of the major ratings companies to have SA’s debt in investment grade, has been delaying its SA country review. Now that the medium-term budget policy statement is out of the way, we should expect its judgment to follow.

A little more than two months ago, the ratings agency gave a rather pessimistic assessment of the fiscal-consolidation plan, based on the assumption that growth would be weaker than the government had forecast.

While Moody’s was spot on in its 4% forecast of the budget deficit for fiscal 2018/19, the medium-term outlook is much worse than it had expected. The ratings company said it expected the deficit to reach 3.5% by 2020/21.

Instead, Mboweni said this week it would be 4.2%, falling to 4% only the following year.

Projections of overall debt as a percentage of GDP were therefore also significantly worse than Moody’s was expecting. Debt as a percentage of GDP would reach 58.9% in 2021/22, while in August Moody’s was looking for 56%.

Is this a case of a new minister coming in, playing straight with investors and owning up to the dire state of the public finances rather than giving optimistic forecasts that will later be shown to be lacking credibility?

Or is it a sign that despite Mboweni’s refreshing talk about the need to take difficult decisions, the government ultimately is not willing to do what is needed to fix the nation’s finances, especially with an election less than a year away?

This would not be a good time for the ANC to start a fight with the unions, even though that might be exactly what the country needs. But benchmark bond yields are at their highest level since November 22 2017, which will probably mean more pressure on the rand.

There are people who ask why the country should be concerned with what ratings companies say or what the rand does, but it is misguided to see these as concerns of only the rich.

To illustrate the cost of a weaker rand to ordinary citizens, perhaps more attention should have been paid to the section in the medium-term budget policy statement dealing with the upward revision of the gross debt for the current fiscal year.

It has been revised up by R47.6bn, with 70% of that due to the rand’s weakness. That is an extra R33bn of debt the country needs to service, with money that could have been used to fund education, health or the police service.

The country has about $22bn in foreign-denominated debt, and every R1 in the exchange rate translates to that rising about R22bn. That is not an insignificant amount as far as the nation’s wealth is concerned.

Another direct consequence is that rand weakness, which pushes up prices of imported goods, will make it even harder for the Bank to refrain from raising interest rates later in 2018.

It does seem unfair that through no fault of his own Mboweni has had a very short honeymoon, if it can be called that, and he has barely four months to come up with a credible budget that can go some way to lifting the gloom.

But, as he noted, “it’s a tough world”.

THIS WOULD NOT BE A GOOD TIME FOR THE ANC TO START

A FIGHT WITH THE UNIONS