Moody’s and Fitch send warning to South Africa

Moody’s Investors Service has warned that slightly lower deficits won’t prevent debt rising in South Africa, as downside risks remain elevated in the country.

The ratings agency was referencing South Africa’s 2021 Budget Review, published on 24 February, in which it slightly lowered its deficit forecasts in response to higher revenue than expected in October and a milder 2020 GDP contraction.

“However, these adjustments are modest and will not prevent government debt burden rising over the next three years. Moreover, uncertainty over the pace of the economic recovery and the capacity of the government to limit spending – especially interest payments and support to state-owned enterprises – remains elevated,” said Lucie Villa, Sr credit officer at Moody’s.

For the financial year ending 31 March 2021 (FY2020), the government now expects to record a consolidated budget deficit of 14% of GDP, compared to its October forecast of 15.7%. A less severe fall in revenue of 11% than the 16% forecast in October is the main driver, although this still implies a year-on-year revenue loss of about two percentage points of GDP.

The unexpected rebound in value-added tax (VAT) receipts since the fourth quarter of2020 and higher-than-anticipated corporate tax receipts were largely responsible for this revenue out performance, said Villa.

The lower than expected deficit in FY2020 led to revisions in the government’s deficit forecasts for FY 2021-23. However, the pace of reduction in deficits is slower given the government’s decision to withdraw some tax-raising measures and a milder recovery in revenue.

Moody’s said that while it has revised down its deficit forecasts following the release of FY2020 estimates, “we continue to expect a slower pace of fiscal consolidation and wider deficits than the government based on our expectations of higher primary spending – especially wages – and interest spending”.

It said that the revisions slow the pace of debt accumulation compared to its previous projections, but it still expects the government’s debt burden will rise to reach 100% of GDP by FY 2024.

“Moreover, risks remain elevated that the government’s debt burden and affordability deteriorate significantly more rapidly than our baseline,” said Villa.

Moody’s comments dovetail those of Fitch, which noted that severe challenges to the government’s ability to implement consolidation persist.

“Government debt will continue to rise in the medium term, posing downside risks that are reflected in the Negative Outlook on the sovereign’s ‘BB-’ rating,” it said.

The government, it said, plans to cut non-interest expenditure by around 2% of GDP relative to pre-pandemic levels, half of which will come from lower payroll spending. “We continue to believe that cuts of this scale will be difficult to achieve and maintain more conservative assumptions than the government about the pace of fiscal consolidation,” said Fitch.

Curbing wage growth remains core to the government’s medium-term fiscal consolidation plan, but will be politically challenging, Fitch advised. The smaller-than-expected fiscal deficit in FY20/21 may give unions leverage to pressure the government to soften its position on wages.

The ratings agency said that the political calendar will also weaken the government’s negotiating position.

“Local elections are due later in 2021 and tensions with its union allies could undermine the ruling ANC party’s performance at the polls. Ongoing conflicts within the ANC, notably over governance issues, are now at a crucial juncture and could also hamper the government’s negotiating position,” it said.

It said that weak growth will complicate the authorities’ efforts to reduce the budget deficit while simultaneously attempting to tackle exceptionally high social inequality and elevated unemployment.

“Meanwhile, the potential need to extend further financial assistance to troubled state-owned enterprises, including the ailing national electricity company Eskom, presents material downside risks to public finances.”

Read: Ramaphosa and Mboweni push for new state bank in South Africa

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Moody’s and Fitch send warning to South Africa