What a difference a couple of years can make.
That was my initial reaction on reading Moody’s Investors Service’s rather upbeat take on SA’s prospects, which saw the ratings outlook changed from negative to stable. Before we get carried away, that change only means we are likely to stay where we are, two notches below investment grade.
Still, it’s a change from April 2020, when the possibility of SA falling into the “high risk” single B rung was being discussed as a possibility. The government had just locked down the economy and SA’s prospects looked dire. Moody’s, which had been the outlier among the ratings agencies with its insistence on giving SA the benefit of the doubt, finally gave in and joined the others in relegating the country to junk.
It was easy to see. Economists were predicting a double-digit economic contraction for 2020 and a similar trend in the budget deficit. It was widely assumed by all, including members of President Cyril Ramaphosa’s economic advisory council, that debt would continue rising quickly and exceed the size of the economy.
The markets were on a downward slide, with 10-year bond yields of about 13% prompting the SA Reserve Bank to intervene in the market to ensure liquidity. The rand was in free-fall, hitting record lows that pushed it within touching distance of R20/$.
It was hard to see light at the end of the tunnel and the government’s promises on fiscal policy were seen to be lacking credibility, having relied much on containing growth in the public sector wage bill. Ratings companies were also not convinced that Ramaphosa had the political capital to push ahead with reforms that would surely face opposition from the ANC’s union and communist allies.
Four months after presenting his budget in February 2020 — just before the country went into lockdown — then finance minister Tito Mboweni had to tear it up.
“Government is spending far more than it collects in revenue,” Treasury director-general Dondo Mogajane wrote in the supplementary Budget Review released in June 2020. He went on to warn that “a failure to halt and reverse this pattern will harm the livelihoods of South Africans for many years to come” and that interest payments would become one of the government’s largest expenditure items, leaving little for hospitals or schools.
Identifying the problem is not the same as dealing with it, and scepticism that this would be achieved was reflected in the markets and in ratings action. In October 2020 the government unveiled a medium-term budget policy statement that forecast a deficit of over 15% of GDP for the year to March 2021. The following month brought downgrades from Moody’s and Fitch Ratings which Mboweni described as “painful”.
The message in the Moody’s update released on Friday night couldn’t be more different, and the government — often on the receiving end of criticism for lacking backbone — gets credit for resisting pressure from the unions and delivering on its promises to contain the wage bill, something few thought it would do.
Of course, just as much of the collapse in revenue collection in 2020 was out of the government’s control — if you exclude the completely self-defeating bans on alcohol and tobacco sales — it has also needed a healthy dose of good luck. That came in the form of a commodity price surge that enabled SA Revenue Service commissioner Edward Kieswetter to announce on Friday that the service had collected almost R200bn more in tax revenue than was forecast in the 2021 budget.
That, together with the fact that the government had “for the first time in many years” limited the growth of its wage bill to well below inflation — 1.6% — was the main factor behind the reduction in the primary deficit, which came in at more than two percentage points higher than Moody’s expected.
What will be music to finance minister Enoch Godongwana’s ears is the indication that the Treasury has managed to restore the credibility of the budgeting process, with Moody’s expressing confidence that the government will stick to its debt consolidation plans. “Over the last two fiscal years the government has shown it was able to reprioritise its spending while staying committed to fiscal consolidation, which Moody’s expects will remain the case going forward.”
While the report goes a bit of the way in arresting what Discovery CEO Adrian Gore described as excess negativity in discussions about SA’s economy and its prospects, it does also point to what needs to be addressed.
The country remains hobbled by broken and bankrupt state-owned companies that present the biggest risks to the improved fiscal outlook. Even there, a debt-to-GDP ratio of 80% is above the level regarded as sustainable for emerging economies, and well above the level that prevailed before the Jacob Zuma administration opened the taps in the wake of the global financial crisis — and never turned them off again.
Moody’s forecast for economic growth, at an average 1.5% in the medium term, is even more miserable than the government’s own prediction of just below 2%. SA might want to celebrate the fact that the economy will reach its pre-Covid size this year, but many of its peers have already achieved that. The US reported on Friday that about 90% of jobs lost in the wake of the pandemic had been recovered, with an unemployment rate of just 3.8%.
In SA, none of the estimated 2-million lost jobs has returned, with the unemployment rate now exceeding 35%. Key departments — from trade & industry to minerals & energy and employment & labour — are run by ideologues who don’t get this.
As much as one would want to be optimistic, that 35% is really the only number that matters. Until there is some movement, it is hard to present a convincing argument to turn the sceptics.
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