How the ratings agencies are likely to react to the medium-term budget

Three priority areas could trigger changes to the country’s sovereign credit rating, according to Lullu Krugel, chief economist at PwC Africa, who was commenting on the medium-term budget policy statement (MTBPS) released Wednesday, 24 October.

According to Krugel these three areas include:

  • The pace of fiscal consolidation;
  • Reforms in state-owned enterprises (SOEs);
  • Measures to lift economic growth.

“On the first point, the message is quite clear: the trajectory of the fiscal balance is not narrowing as previously expected,” Krugel said.

“The peak in public debt (a percentage of GDP) is also being pushed out further. The deterioration in deficit and debt numbers has been seen frequently over the past five years, and rating agencies will have to ask the question as to how this may influence South Africa’s creditworthiness going forward.”

On a more promising note, Krugel said that there is certainly some positive momentum of late under Minister of Public Enterprises Pravin Gordhan and his efforts to reform SOEs.

“This includes increased profitability of international routes services by South African Airways (SAA), work on turnaround plans for SAA and South African Express, and the appointment of new boards at several troubled public enterprises,” she said.

Krugel said that economic growth also remains a thorny issue.

“Forecasts for growth in the MTBPS are underpinned by the success of the economic recovery and stimulus plan,” the economist said.

“Rating agencies will need to make their own projections based on their perspective on the extent to which the stimulus plan will be successful.

“Based on these three factors, rating agencies will probably not be too enthusiastic about the MTBPS.

“It does not suggest any improvement in sovereign creditworthiness. On the contrary, the languishing economy is keeping the government from implementing any real fiscal austerity.

“As can be seen in the projected figures, this results in rising debt for the state that future generations of South Africans will need to pay for.”

Moody’s announced earlier this month that it would hold off on its latest ratings decision until after the release of the mini-budget.

Moody’s is the only one of the three major credit-rating companies that still rates the country’s debt at investment grade.

Last year, a widening fiscal deficit and slower economic growth projections led S&P Global Ratings and Fitch Ratings to strip the country of its investment rating, sending yields skyrocketing and the rand weaker.


Public debt rising

Revised revenue and expenditure data for the next few years point to the fiscal deficit deteriorating substantially compared to February’s expectations, Krugel said.

“A planned narrowing of the shortfall (as percentage of GDP) has largely been abandoned. A deficit equal to 4.0% of GDP in 2017/18 and 2018/19 will be followed by shortfalls of 4.2% of GDP in the following two years.”

Krugel said that funding the fiscal deficit will require some prudent debt management. However, the outlook is far from favourable, she said.

“The government is planning to expand public debt from R2.8 billion (55.8% of GDP) in the current fiscal year to R3.7 billion (58.5% of GDP).

“As a result of wider fiscal deficits than previously planned, public debt will now only peak in 2023/24 – a year later than envisioned previously – at 56.6% of GDP.”


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How the ratings agencies are likely to react to the medium-term budget