Moody’s warns over the lack of detail in Mboweni’s budget

Ratings agency Moody’s warns that despite finance minister Tito Mboweni’s talk of driving economic reform and cutting government spending, South Africa’s economy is likely to remain flat, and economic change to be slow.

In a review of the 2020 medium-term budget policy statement (MTBPS) presented by the finance minister this week, the ratings firm flagged one major overarching concern with the budget: a lack of detail around implementation.

“Although the government’s focus remains on structural reform and fiscal consolidation, this year’s MTBPS, like last year’s, does not outline how and when it will implement policies to boost growth and arrest the deterioration in public finances.

“As a result, we expect the economy will remain subdued and for fiscal consolidation to be slow, sustaining the rise in government debt in the next couple of years,” Moody’s said.

From the emergency budget tabled in June, through the various announcements of economic recovery plans and ways forward for South Africa, ratings firms, analysts, investors and economists have all raised the same questions around implementation.

“The MTBPS provides little additional detail on the implementation of structural reforms that would boost economic activity sustainably,” the ratings firm said, noting that the budget presented nothing new.

“The government’s fiscal strategy remains broadly unchanged,” it said.

As such Moody’s forecasts for South Africa are worse than those contained within the MTBPS:

• Based on higher than projected interest and primary spending, it forecasts deficits that are around 2.5% of GDP wider than the MTBPS in each year from 2021 onward.
• In total, it forecasts debt-servicing costs will reach 6.6% of GDP by fiscal 2022, compared to the government’s expectations of 5.6%.
• At that point, the average interest rate on debt would reach 7.8%, exceeding the growth in nominal GDP (5.6%).
• As a result, South Africa would need a 2.5% primary surplus to stabilise debt-to-GDP, compared to our projection of a 4.7% primary deficit.

“The authorities propose to contain spending where possible. In fiscal 2020, it will contain growth in public sector salaries at 1.8%, which is below inflation and the rate set under the three-year agreement on public sector wages running for fiscal years 2018-2020,” Moody’s said.

While government expects further cuts on the wage bill beyond 2020, the ratings firm said negotiations with social partners will be difficult.

The wage bill

The problem of government’s moves to cut the wage bill, and the response this will evoke from unions, was similarly flagged by ratings firm Fitch, which noted that the state has a poor track record of getting its way when it comes to wage negotiations.

“The current wage agreement from 2018 will expire in April 2021 and it is likely that negotiations for the new agreement will take at least until then.

“The track record on negotiating wage agreements in line with budget assumptions is weak, and there is limited room for offsetting measures in other expenditure areas,” it said.

The lack of detail around the wage cuts, and the shaky numbers projected in the budget, could very well lead to further rate cuts by agencies, said Intellidex analyst, Peter Attard Montalto.

“The possibility of ratings outlook cuts in the coming six months by most agencies (has been solidified). Of concern…National Treasury is unable to give them sufficient detail on the public sector wage bill cuts,” he said.

“There is significant strike risk from unions stemming from this outlook. We see political commitment to this as paper-thin,” he said.

Public servant union the PSA, as well as union federation Cosatu have already indicated that the wage freeze written into the budget will not fly – with threats to down tools and strike should government move ahead with its proposed plan.

The PSA has already instituted court proceedings against the government for its reneging of the previous wage agreement. Should it lose the case and be forced to back-pay wage increases, it could be on the hook for as much as R294 billion.

Read: To make the budget work, government needs unions on board – and they’re not