Finance minister Tito Mboweni has three months to deliver a credible plan to stabilise government debt, starting with finding savings of about R150bn, and tackle the risks posed by state-owned enterprises (SOEs), especially Eskom, if SA is to avoid junk status after the 2020 February budget.
But most of the R150bn in budget savings, promised in Mboweni’s medium-term budget policy statement (MTBPS) last week, will probably have to come from the state wage bill, say economists, putting the government on a collision course with public sector unions.
Moody’s Investors Service wants these issues dealt with alongside efforts to lift economic growth, according to its ratings review delivered on Friday.
Moody’s cut its rating outlook on SA government debt to negative. While this would usually imply a 12 to 18-month window for the government to get its house in order to avoid a downgrade, Moody’s wants to see a plan in place by February.
"The development of a credible fiscal strategy to contain the rise in debt, including in the 2020 budget process and statement, will be crucial to sustain the rating at its current level," said Moody’s lead sovereign analyst for SA, Lucie Villa.
But she warned that the change in Moody’s outlook signalled "rising concern that the government will not find the political capital to implement the range of measures it intends, and that its plans will be largely ineffective in lifting growth".
The change in the outlook came after the deep decline of the government’s finances was crystallised in Mboweni’s policy statement, which forecast state debt levels to rise to 71.3% of GDP by 2022/23 and the budget deficit to average 6.2% in the coming three years.
To halt this slide, Mboweni said the state would target a primary budget balance — in other words it will aim to match tax revenue to noninterest spending — by 2022/23, excluding any support to Eskom. To do this it needs to find R150bn over the medium term either through tax increases or spending cuts, primarily on the state wage bill.
"That is the fiscal target that they absolutely have to deliver on, to avoid a downgrade," Gina Schoeman, Citi’s SA economist, told Business Day.
There is little more that the Treasury can do to raise money through tax measures, said Schoeman, given the weak economy. But, at the same time, the Treasury has done all it can on the expenditure side of the budget, except cut the wage bill, she said. "The next couple of months are going to be a head-on [confrontation] between the government and the unions."
The difficulty of talks with labour, who have already made clear their opposition, could increase expectations that a downgrade may come sooner, Schoeman said.
The extent of the wage reductions was a "material ask" said Arthur Kamp, chief economist at Sanlam Investments. It was not clear, he said, that an agreement with unions could be reached by February.
Moody’s had also highlighted the "long-standing" issues of financially weak SOEs, particularly Eskom. Last week public enterprises minister Pravin Gordhan announced plans to overhaul Eskom’s structure, including the establishment of a stand-alone transmission operator. The Eskom plan, however, would only start generating results in 2021, said Kamp, so the state was going to have to deliver on the consolidation measures.
"If we don’t do this adjustment in February’s budget, I think there will be general acceptance that we are just slip- sliding into a debt trap," he said.
The government has to deliver on a credible economic growth plan, said Iraj Abedian, CEO of Pan-African Investment and Research Services. "They must stop having conferences and talking about growth ... they must get investments flowing."
Shortly after his policy statement, Mboweni released the Treasury’s updated economic strategy paper. The plan has already met resistance from ANC alliance partners, Cosatu and the SACP.
In her statement, Villa highlights the government’s inability to implement initiatives responding to long diagnosed issues, including low growth and high unemployment, thanks to the resistance of vested interests, as well as the "social and political challenge" of imposing reforms.
Nevertheless, if the government could not achieve the full fiscal consolidation plan, a concrete plan on growth could stay Moody’s hand, Schoeman said. The difficulty, however, was that these reforms took time to show up in economic growth figures.
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