Moody’s expects the government of national unity (GNU) to come to an agreement on a budget that does not stray from the fiscal consolidation path, warning should differences in the government become more entrenched this will increase fiscal policy uncertainty.
The ratings agency was reacting to the postponement of the budget last week after disagreements on the proposed two percentage point VAT hike.
“In our view, the government remains committed to fiscal consolidation and we expect that the GNU will eventually reach an agreement to pass a budget that supports a continued gradual decline in the fiscal deficit,” Moody’s said in a note, dated February 20.
“The delay points to some friction in the budget process within the coalition government which we have factored in our baseline assumptions about the functioning of the government.
“However, indications that the disagreement within the GNU on key policy areas is more entrenched and difficult to resolve than we expect would increase uncertainty around fiscal policy and weigh on SA’s policy effectiveness,” it said.
“The predictability of fiscal policy supported by a strong and transparent budgetary framework is a key tenet of our assessment of a sovereign’s institutional strength and its credit profile,” Moody’s said.
The budget was postponed at the 11th hour last Wednesday, with a new date pencilled in for mid-March.
The sticking point as parties thrash out their differences is the proposed VAT hike from 15% to 17%. According to the draft budget, this increase would have been offset by an increase in the number of zero-rated goods, which would shield the poor from the proposed hike.
Izak Odendaal, Old Mutual Wealth chief investment strategist, said on Monday unfortunately SA had no easy choices left as it pondered the budget.
“From investors’ point of view, it would have been positive if Treasury was prepared to take the politically unpopular step of raising VAT rates by two percentage points. The fact that the cabinet was not sufficiently briefed now appears clumsy but it’s not sinister,” Odendaal said.
“The pushback against the VAT increase means that Treasury must return to the drawing board. Importantly, however, at issue is not the principle of fiscal consolidation, but rather how best to achieve it,” he said.
From investors’ point of view, it would have been positive if Treasury was prepared to take the politically unpopular step of raising VAT rates by two percentage points.
“There are few alternatives to raising more revenue. While SA’s VAT rate is on the low side by global standards, its personal income tax rates are relatively high and imposed on a narrow base of individual taxpayers. SA’s company tax rate is also quite high by global standards, and the international trend has been for lower company tax rate.”
Moody’s said the budget announcement would be important in informing its assessment of the risks to fiscal consolidation from the potential need to provide additional support to state-owned enterprises and on social spending projects.
“While electric utility Eskom is making progress on its recovery plan, with only minor power outages since March 2024, the regulator’s decision to increase tariffs by 12.7%, which is far below the 36% requested, will pressure cash flows at the same time as arrears from municipalities continue to accumulate.
“Furthermore, the financial situation of the national freight rail network Transnet remains very challenging. The government’s R47bn (0.6% of GDP) loan facility provided in December 2023 has been exhausted, indicating the need for additional support or more decisive action to shore up the entity’s financial position,” Moody’s said.
“At the same time, social spending pressures are significant given high inequality and low growth, which fosters very high unemployment. There is a risk that higher-than-planned spending on grants and wage agreements will delay consolidation efforts.”
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