A downgrade by Moody’s Investors Service remains firmly on the cards for SA as the slow pace of reforms makes it unlikely that the country can get its fiscal house in order quickly, global analyst suggested this week.
According to a report by global economic forecast and analysis group FocusEconomics, rapidly deteriorating fiscal metrics and the absence of concrete policy measures to avert a fiscal crisis suggest a downgrade by Moody’s is likely to happen.
This could hamper already downbeat confidence and worsen the precarious debt situation, putting more downward pressure on the rand.
In the medium-term budget policy statement (MTBPS) in October, finance minister Tito Mboweni said hard and frank negotiation with labour will be needed to bail out government from its fiscal hole by contributing the lion’s share of the R50bn the state needs to stabilise its finances.
The public servants’ salary bill is regarded as one of the biggest threats to SA’s finances, and cutting it will be vital for the country to dodge a rating downgrade from Moody’s, the only agency still ranking government debt on investment grade.
However, public service unions have rejected calls for wage cuts saying it is unfair to expect workers to take the pain of the previous excesses and corruption committed by the government.
A downgrade could trigger sizeable capital outflows as rand bonds would be excluded from the FTSE World Government Bond Index. The cost of borrowing for the government would rise in international markets, ramping up pressure on already strained public finances, FocusEconomics said.
Moody’s recently held off from downgrading the country’s debt to junk. However, the ratings agency cut the outlook on the rating from “stable” to “negative”. This was after Mboweni’s bleak MTBPS that projected budget shortfalls to exceed over 6% of GDP over the next three years.
Notably, the government downgraded its public debt forecast, and now sees it rising above 70% of GDP over the next three years versus February’s projections that it would stabilise at about 60%.
The FocusEconomics report highlighted that the budget deficit for this fiscal year is projected at 5.9% of GDP, revised down from February’s estimate of 4.5%. On the expenditure side, non-interest spending for the current year has shot up, mainly due to R26bn in additional financial support to bail out state power firm Eskom, and also owing to R11bn awarded to smaller financially distressed state-owned companies. Meanwhile, on the revenue side, lower wages, job losses and a fall in firms’ profitability have weighed on overall tax receipts.
“Consequently, the government revised down its revenue projections for the next three years, which has in turn markedly deteriorated the outlook on the budget balance,” FocusEconomics said.
FocusEconomics Consensus Forecast panellists see growth of 1.3% in 2020, which is down 0.1 percentage points from October’s forecast. In 2021, they see growth rising to 1.7%. Meanwhile, the SA Reserve Bank sees growth at 1.5% in 2020 and at 1.8% in 2021.
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