3 things Mboweni must address in his budget to stop South Africa from being downgraded to junk

South Africa’s sovereign debt has been downgraded to sub-investment grade by S&P and Fitch Ratings due to the deterioration in its fiscal position over the past decade.

If rating agency Moody’s Investors Service were to also downgrade the debt to sub-investment level, South Africa would be removed from the Citi World Government Bond Index.

This is according to tax experts at PwC who note that a downgrade will prompt asset managers and pension funds to sell billions of rands worth of domestic bonds.

This would sharply increase the cost of debt and pressure the exchange rate, it said.

“To appease credit rating agencies, finance minister Tito Mboweni will need to talk to three specific issues during his budget speech,” PwC said.

These are:

  • The pace of fiscal consolidation;
  • Reforms in SOEs; and
  • Measures to lift economic growth.

“By effectively outlining a path forward for South Africa’s fiscus, the minister will be able to satisfy credit rating agencies and would steer the economy away from a sub-investment grade.”

PwC said that the fiscal budget for 2019/20 will likely contain difficult prioritisation decisions to ensure that government can meet its fiscal consolidation objectives and appease rating agencies.

It added that the public sector wage bill and SOE finances will be top of mind, as National Treasury looks for ways to reign in growing government debt and bring the fiscal deficit down to more manageable levels.

“In spite of limited fiscal room, the focus of the 2019/20 fiscal budget must also fall on measures to stimulate investor confidence and reignite economic growth,”it said.

“Without prospects of an economic growth recovery, South Africa’s fiscal situation will likely remain constrained in coming years.”

Read: R212 for a loaf of bread in South Africa?

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3 things Mboweni must address in his budget to stop South Africa from being downgraded to junk