Achieving the government’s debt stabilisation aims depends on “difficult negotiations” with public sector unions, Fitch Ratings said after finance minister Tito Mboweni’s high stakes medium-term budget policy statement (MTBPS) presented to Parliament on Wednesday.
The medium-term budget painted a slower path for fiscal consolidation hinging on steep cuts in public servant pay.
But the government’s track record of negotiating wage agreements in line with budget assumptions “is weak and there is limited room for offsetting measures in other expenditure areas”, the ratings agency said in a statement on the medium-term budget on Thursday.
Fitch has SA on a negative outlook, after it downgraded it in April, due in part to the deteriorating outlook for government debt. This is in line with peer agencies Moody’s Investors Services and S&P Global, which also downgraded SA in March and April, respectively, on the back of ailing government finances, and the economic shock caused by the Covid-19 pandemic.
Mboweni told journalists that he expects to have a “robust debate” with ratings agencies regarding the state’s finances — but does not see the need for any further downgrades, saying, “I think we have been punished enough.”
The medium-term budget outlined plans to consolidate debt at a slower pace than was outlined in the June supplementary budget, stretched over five years rather than three.
Though deficit and debt levels for the 2020/2021 financial year remain unchanged from June, debt will rise to 92.9% by 2023/2024 before peaking at 95.3% in 2025/2026 then slowly decline for the remainder of the decade.
This compares with the previous “active scenario” presented in the supplementary budget in which the debt ratio stabilised at 87% by 2023/2024.
The new figures come with the need for steep spending cuts amounting to just more than R306bn. Though these are more moderate than the cuts flagged in June, they hinge predominantly on suppression of the public sector wage bill, which has been vigorously opposed by public sector unions.
Fitch also warned that the broader environment for debt stabilisation is challenging.
After a contraction of 7.8% this year, the Treasury expects the economy to rebound, growing at 3.3% for 2021, 1.7% for 2022 and 1.5% for 2023.
But growth “will remain weak”, said Fitch, despite the economic reconstruction and recovery plan released by President Cyril Ramaphosa earlier this month, aimed at rebooting SA’s economy.
“Tensions within the governing ANC will also hamper policymaking, and exceptionally high inequality raises social pressure for additional spending,” Fitch said.
Some analysts have warned that the MTBPS could add pressure to SA’s ratings outlook.
Though the debt trajectory can be considered more realistic, “it is likely to be viewed unfavourably by credit ratings agencies, with further sovereign credit rating downgrades a real possibility”, said Investec economist Lara Hodes.
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