Has the budget done enough to keep a Moody’s downgrade at bay?

Analysts and economists have largely welcomed the 2020 budget outlined by finance minister Tito Mboweni, particularly for its bold attempt to cut expenditure by curbing public sector wages. But has it done enough to persuade ratings agency, Moody’s from cutting the country’s sovereign rating to junk stats?

Johann Els, Old Mutual Investment Group chief economist, said that the budget shows National Treasury is willing to make hard choices during difficult times. He said that minister Mboweni’s budget is likely to lift business sentiment and ease some pain for long-suffering consumers.

However, while the absence of net tax hikes is good news for consumers, Els cautioned that risks remain around the ambitious plans to cut expenditure on the wage bill, as this still needs to be negotiated with unions.

Baseline spending reductions of R261 billion in were announced by Finance Minister Tito Mboweni on Wednesday, with adjustments on the wage bill penned in at about R160 billion over the medium term.

“While the Budget was better than expected and the positives outweigh the negatives, it was probably not good enough for Moody’s, and I expect South Africa’s sovereign rating to be downgraded in March,” Els said.

A “small probability”, however, remains that Moody’s may delay its decision to see how negotiations with unions pan out, he said.

This sentiment is echoed by Sanisha Packirisamy, economist at Momentum Investments, who said that Moody’s may take a wait and see approach to assess whether the wage bill cuts are achievable.

Bloomberg notes that financial markets have been pricing in a downgrade for months, and the other two major rating companies (S&P and Fitch) have had South Africa at junk status for two years. Should Moody’s follow suit, the nation would suffer enormous financial consequences.

“Despite still huge deficits and no debt stabilisation, the Budget was on balance better than expected, given the emphasis on expenditure reduction and not tax increases. But the large deficit, debt ratio, primary deficit, combined with still weak economic growth and the risks around the wage bill savings – will still lead to a Moody’s downgrade in March,” Els said.

According to Arthur Kamp, economist at Sanlam Investments, the budget is the best we could have hoped for in difficult circumstances. “In essence, it aims to constrain consumption spending relative to capital expenditure, while recognising that persistent tax increases are counter-productive and constrain growth.”

Kamp said that attention will now revert to Moody’s in March. “A key requirement is stabilisation of the government’s debt level, including guaranteed debt of state-owned companies (mostly Eskom debt), while the agency also stressed the importance of raising the potential growth rate.”

Does Budget 2020 do enough?

“The government’s focus on competition policy, implementation of the Integrated Resource Plan, a willingness to leverage the private sector and to promote and incentivise small and medium enterprises, while supporting industrial parks, along with measures aimed at improving the ease of doing business (and lowering the cost of doing business), should help promote growth over time.

“But, the continued upward march in the debt ratio remains a problem. While this continues, downgrade risk remains,” Kamp said.

Moody’s has previously stated that the country’s state owned Eenterprises (SOEs), led by Eskom remain a real threat to future growth.  Indeed, the state-owned power utility is seen by Goldman Sachs Group as the biggest threat to the country’s economy, given its debt position of around R450 billion, and growing.

Maarten Ackerman, chief economist and advisory partner at Citadel, noted that while R60 billion has been set aside for Eskom and SAA over the medium term, “Mboweni explicitly noted that the two parastatals are expected to soon stand on their own two feet without any further funds being siphoned from government coffers”.

“Together, these measures should be enough to stave off a credit rating downgrade from Moody’s, which is unlikely to push a reform-minded government off the edge of the cliff, so to speak.”

Ackerman warned that South Africa remains on a tightrope and, despite government’s best laid plans, just one slip could completely derail the proposed framework over the next three years and prevent the country from meeting its fiscal targets.

“Unfortunately, government’s track record on implementation or action has generally been poor. So, while Mboweni has said all the right things, government now needs to do the hard work in delivering or executing its plans.

“Without having made the necessary progress on effecting its plans by the time of the 2020 MTBPS, South Africa could again face the risk of a Moody’s downgrade.

“This is particularly significant given that debt-service costs remain the fastest growing expenditure item on the balance sheet, and that a downgrade would take even more money away from crucial areas such as education, health and social grants in favour of interest payments.”

This is what Fitch and S&P had to say about budget 2020

Fitch: A severe deterioration of finances

South Africa’s 2020 Budget has highlighted the severe deterioration underway in public finances and the long-term policy challenge of stabilising government debt, says rating agency Fitch.

The group noted that fiscal metrics have worsened compared with the Medium-Term Budget Policy Statement (MTPBS) in October, despite the announcement of significant expenditure cuts.

“These consolidation measures rely heavily on hoped-for moderation in public sector wages, which might not materialise, adding further risks to South Africa’s deficit and debt trajectories,” it said.

Fitch said that the government would face an uphill battle in cutting public sector jobs as it squares off against the country’s labour unions.

“The most recent three-year public sector wage settlement only expires in April 2021, and the last wage agreement in 2018 was significantly higher than budgeted,” it said.

“A key public sector trade union has declared the agreement is sacrosanct and labour representatives are showing little sign that they would accept lower wage growth to support fiscal consolidation.

“The political scope for making substantial cuts in other areas, should wage savings not materialise, also appears limited, given social pressures for improvements in the delivery of public services.”

S&P Global: Government bought some time

The latest budget affirmed the weaker baseline seen in the October MTPBS as well as lower economic growth said Tatonga Rusike, sovereign analyst of S&P emerging markets.

“What (the budget) has done is give time to government and S&P to see how realistic the assumptions will be and whether they can get what they want from the unions,” he said in an interview with CNBC Africa.

Speaking on Eskom – which has been cited as key to South Africa’s risk  – Rusike said that the Budget did not announce any new measures to deal with the power utility’s problems and that more could have been done.

“We have been with the challenge of Eskom for a while now,” he said.

“If you are looking for more immediate reforms for SOEs you can see the process that has gone on with SAA and its business rescue. They immediately announced a process to cut routes and to consider reducing employment.

“I don’t think that some of the announcements made actually directly address the financial sustainability of Eskom.”

Reporting by Gareth Vorster and Ryan Brothwell

Read: Looking to 2020 and beyond a Moody’s downgrade

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Has the budget done enough to keep a Moody’s downgrade at bay?