Ratings agencies warn SA to rein in debt or else —

The government is living on borrowed time as two major ratings agencies have warned that SA could be on track for further downgrades if it does not deliver on its promises to rein in debt.

Fitch Ratings, which already has SA two steps below investment grade, said on Friday that failure to come up with a credible plan to deal with debt and boost the economy “could lead to negative rating action”.

Moody’s Investors Service, which in March became the last of the major ratings companies to move SA into junk, said the day before that “the speed at which the government recovers its revenue intake and is able to ultimately curb the debt trend will drive creditworthiness”.

Both agencies have SA on a negative outlook, meaning that the next move is more likely to be further into junk than a move back towards investment grade.

Further downgrades would mean that SA will have to endure higher borrowing costs for longer. That would for longer divert funds away from critical services such as education and health.

It would also mean increased volatility as its markets become dominated by speculative funds that are more sensitive to shortterm shifts in sentiment.

The comments by the ratings agencies come after the presentation of the supplementary budget by finance minister Tito Mboweni on Wednesday.

In the supplementary budget, Mboweni forecast a consolidated budget deficit of 15.7% of GDP in the current fiscal year and for government debt to rise to 81.8% of national output.

While Mboweni outlined a passive scenario in which a sluggish economy and a lack of action on borrowing allows debt to jump to more than 140% of GDP before the decade is out, the government hoped to avert that and have it peak at 87.4% in 2023/2024, before being reduced gradually thereafter.

However, the ratings companies are sceptical because this primarily rests on the government achieving R230bn in spending cuts, which would come on top of the R160bn reduction in the public sector wage bill that was proposed in the budget in February.

Unions are fighting against the initial cuts, and have shown no desire to compromise.

The agencies are unlikely to pronounce on SA’s ratings until after the medium-term budget policy statement scheduled for

0.5% the rand’s weakening against the US dollar on Friday to R17.23, pushing its drop in 2020 to 19.1%

delivery in October. “If you really want to bring state spending down you must start now,” said Efficient Group chief economist Dawie Roodt.

“What the ratings agencies are going to look for is what’s happening in the actual numbers,” said Roodt.

Market concern about SA’s debt trajectory had been evident in the bond market, where it has become relatively more expensive for the government to borrow for longer, reflected in a steepening yield curve.

That has been obscured partly by the Reserve Bank’s purchasing of bonds in the secondary market.

While not aimed at influencing the price, the Bank’s involvement has restored calm, pushing 10-year yields, which had jumped to record highs of about 13% in March, to below 9%.

The spread between the two and the 30-year bonds widened to 618 basis points from 330 at the beginning of 2020.

This is an indication that investors prefer the safety of shorter-dated notes, which have also been supported by interest rate cuts by the Bank.

On Friday, the rand had weakened 0.5% to R17.23/$, pushing its 2020 drop to 19.1%.