Moody’s is not impressed with Gigaba’s risky budget

Global ratings firm Moody’s says that the mid-term budget policy statement delivered by finance minister Malusi Gigaba last week was “credit negative” for the country, with not enough being done to curb government spending as revenue streams decline.

In an assessment released on Monday (30 October), Moody’s VP and senior analyst, Zuzana Brixiova, said that Gigaba’s budget had no indication of continuing fiscal consolidation that had been driven hard in previous statements.

This was both in terms of containing the fiscal deficits and reducing mandatory recurrent spending, he said, “undermining debt sustainability and eliminating room to deploy fiscal stimulus in the event of a negative economic shock”.

“Fiscal risks stemming from the relatively rapid debt increase are exacerbated by a continued increase in government guarantees to state-owned enterprises, where almost half is concentrated in Eskom,” Brixiova said.

“The lack of fiscal consolidation in the budget is also a setback to already feeble business confidence and growth. The lack of fiscal prudence indicated by the budget will undermine growth in an economy in a recession since first-quarter 2017 with weak economic activity, according to recent high-frequency indicators.”

Gigaba’s statement was the first fiscal policy document in the past several years that does not have the objective of fiscal consolidation, Brixiova said.

“In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk.

“However, with lower levels of revenue than formerly projected, the thrust of the adjustment would need to come from the expenditure side, which will be challenging to achieve amid rising spending pressures in the run up to 2019 elections.”

Moody’s currently holds South Africa’s credit ratings in the highest regard out of all three major ratings groups, having held both local and foreign currency debt ratings at one notch above junk status, with a negative outlook.

S&P Global has South Africa’s foreign currency debt in junk, with local currency debt still one notch above junk. Fitch has South Africa in full junk, with both local and foreign currency debt in sub-investment grade.

Moody’s and S&P Global have ratings reviews planned for late November, with Fitch expected to announce its ratings decision around the same time.

Given the state of South Africa’s economy, and the bleak picture painted by Gigaba’s statement, many economists and analysts have said that full junk for South Africa is practically inevitable.

Read: Full junk status for South Africa is inevitable: analysts

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Moody’s is not impressed with Gigaba’s risky budget