SA far from winning over ratings agencies
• Moody’s and Fitch are sceptical that the government can deliver on a slower debt trajectory
Despite a 2021 budget that committed to greater fiscal consolidation, both Moody’s Investors Service and Fitch Ratings appear doubtful about the government’s ability to deliver on all its promises, expressing scepticism that SA can deliver on a slower debt trajectory and the planned spending cuts.
Despite a 2021 budget that committed to greater fiscal consolidation, both Moody’s Investors Service and Fitch Ratings appeared doubtful about the government’s ability to deliver on all its promises.
Finance minister Tito Mboweni’s recent budget attempted to balance support for an economy still reeling from the Covid-19 pandemic with firm commitments to spending restraint, in particular suppressing the public sector wage bill.
Though economists and analysts deemed it positive under SA’s constrained circumstances and it raised hope that SA may get a ratings reprieve after a series of downgrades in 2020, Moody’s and Fitch expressed scepticism that SA can deliver on a slower debt trajectory and the planned spending cuts.
An almost R100bn tax overrun, improved growth expectations and a hard line on spending mean the government is predicting the consolidated budget deficit for 2020/2021 to come in at 14% of GDP. Though this is below the 15.7% projected in the October medium-term budget policy statement, it remains the largest deficit on record.
Debt levels, meanwhile, are projected to rise at a slower pace than forecast in October. The government is targeting a primary budget surplus by 2024/2025, which will help stabilise debt levels at 88.9% of GDP by 2025/2026, down from 95.3% in 2025/2026 predicted in the medium-term budget.
But Moody’s said on Friday that the deficit reductions were “modest” and “will not prevent the government debt burden rising over the next three years”. The agency expects government debt to hit 100% of GDP by the 2024 fiscal year.
“Moreover, uncertainty over the pace of the economic recovery and the capacity of the government to limit spending (especially interest payments and support to state-owned enterprises) remains elevated,” senior credit analyst Lucie Villa said.
Fitch, in a comment released after Wednesday’s budget, said “severe challenges to the government’s ability to implement consolidation persist”, despite an improved fiscal trajectory.
“Curbing wage growth remains core to the government’s medium-term fiscal consolidation plan but will be politically challenging,” Fitch said.
The state is pencilling large non-interest spending reductions in the coming years, with R303.4bn intended to come from savings on the wage bill over the coming three years.
Public sector unions are opposed to this move, which could become a headache for the Ramaphosa administration as it heads into local government elections later this year.
Moody’s and Fitch Ratings both downgraded SA deeper into junk status in November, with Moody’s now holding SA two notches into junk. Fitch has SA three notches into junk, on par with fellow ratings agency S&P Global.
Both Moody’s and Fitch have SA on a negative outlook, meaning they are more likely to downgrade the country further if they remain unconvinced of SA’s ability to improve its fiscal metrics. S&P has SA on a stable outlook as of its review in November 2020.
Though SA is already deemed junk, further downgrades are likely to increase the cost of borrowing for the country. This is at a time when SA is one of the worst performers among peer countries when it comes to the size of its budget deficit and its debt service burden. According to the
over the medium term, debt-service costs as a share of tax revenue are expected to average 20.9%, or almost 21c of every rand.
In a recent note Investec chief economist Annabel Bishop said that despite reductions in projected borrowings outlined in the budget, this “still does not tally with debt sustainability” and risks SA being pushed further into junk status. Though the budget projections are an improvement, she said, “ratings agencies will wait to see if government manages to stabilise its projected debt quantum, then lower it, before thinking of any rating upgrades”.
She said: “SA’s current projections still do not show marked fiscal consolidation, and so do not bring the fiscal deficit down to the accepted 3% of GDP or the debt projection down to around 60% of GDP for [middleincome] economies.”
RATINGS AGENCIES WILL WAIT TO SEE IF GOVERNMENT MANAGES TO STABILISE ITS PROJECTED DEBT QUANTUM