SA’s R500bn support package will not be enough to prevent a sharp contraction in GDP over 2020 and will lead to a significant jump in debt, Moody’s Investors Service said in a report issued on Friday.
Moody’s, which stripped SA of its last remaining investment-grade rating in March, expects the country’s budget deficit to surge to 13.5% of GDP in the 2020 fiscal year, up from its previous forecast of 8.5%. That will push the country’s burden up by 15 percentage points to 84% of GDP, inclusive of guarantees to state-owned enterprises, said the report.
Moody’s cut its GDP forecast for SA for 2020 to a contraction of 6.5%, having said earlier in April that the economy would shrink by 2.5%. It expects a rebound of 4.5% in 2021.
President Cyril Ramaphosa announced the package on Tuesday, which included increased spending on health and social welfare, a R200bn credit guarantee scheme for firms, wage support for employees and tax relief measures.
Finance minister Tito Mboweni, who briefed journalists on Friday, was not specific about how much of the package would need to be raised in new debt. Moody’s, which like all credit ratings agencies has direct and frequent access to the Treasury, estimated that SA would need to raise an additional R130bn to fund the measures. SA’s bonds have weakened since the package was announced as investors worry about how it will be funded.
The rest of the package will be funded through reprioritised spending from the February budget; tax relief, which will for the most part affect the timing of cash flow to the government; and funding provided by banks for the guarantee scheme, which will be reflected as a contingent liability on the government balance sheet. The tax measures will cost 0.5% of GDP over the 2020/2021 fiscal year, said Moody’s.
Mboweni said on Friday that the SA government will access $1bn from the New Development Bank and about $55m from the World Bank, and is entitled to apply to the International Monetary Fund (IMF) for $4.2bn in emergency funding. This will leave SA with a funding gap which will require further funding. Mboweni declined to say on Friday whether SA would increase its bond issuance.
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