Rand slides as Moody’s weighs in with budget concerns

The rand surrendered the gains it made after the budget after ratings agency Moody’s warned on Thursday (28 February), that risks remain skewed toward a higher debt path for South Africa.

Analysts and economists have largely welcomed the 2020 budget outlined by finance minister Tito Mboweni, particularly for its bold attempt to cut expenditure by curbing public sector wages.

However, Lucie Villa, Moody’s vice president – senior credit officer, said that fiscal deficits will remain wide, around 6%-7% of GDP in the next few years, which will increase the government’s debt burden over the budget period.

“Moreover, uncertainty regarding the success of negotiations with the country’s unions to reduce the wage bill and potential contingent liabilities from state-owned enterprises (SOEs) mean risks to budget forecasts are elevated.”

Bloomberg reported that the ANC has called an emergency meeting to discuss the government’s plans to curb its wage bill – a move that has angered its labour-union allies.

The National Treasury proposed in the budget on Wednesday that pay increases, benefits and promotions for the nation’s 1.3 million civil servants be limited, with plans to save the state R160 billion over the next three fiscal years.

Unions rejected the move, saying workers shouldn’t be made to pay for the government’s failure to spur growth and contain its debt.

The African National Congress’s national working committee will convene on 2 March to discuss the matter.

South Africa’s state wage bill has surged 40% more than inflation over the past 12 years and accounts for more than a third of total government spending.

National Treasury Director-General Dondo Mogajane said on Wednesday that the plan to cut the state-wage bill is expected to result in lower pay increases rather than reduced remuneration, Bloomberg said.

Financial markets have been pricing in a downgrade for months, and the other two major rating companies (S&P and Fitch) have had South Africa at junk status for two years.

Should Moody’s follow suit, the nation would suffer enormous financial consequences.

“The authorities have yet to negotiate any moderation in wages with the country’s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations,” said Moody’s Villa.

“If the government fails to contain the rise in the wage bill and compensation spending increases in line with the MTBPS, we estimate that the fiscal deficit would reach 7.5% of GDP in the fiscal year 2020 and 7.1% in the fiscal year 2021.

“The SOE sector, which has been the main source of unexpected spending in recent years, increases the risk of a wider-than-expected deficit,” Villa warned.

Even if the government achieves its planned spending restraint, the government’s projected primary deficit of 1.1% of GDP by fiscal 2022 would still be too wide to stabilize the debt burden given weak growth projections and our expectation of a further rise in the interest bill, Moody’s said.

“Risks remain skewed toward a higher debt path given the challenges in containing spending growth and persistent risks to growth,” Villa said.

Bianca Botes, treasury partner at Peregrine Treasury Solutions, noted that it has been a rough week for markets all round, as the global economy struggles to come to terms with the fallout of the COVID-19 virus and the ultimate fully-fledged economic impact.

Bloomberg reported that fear gripped Asian markets Friday after the biggest rout for equities on Wall Street since 2011, with investors flocking to the yen to find shelter from the expected blow to corporate earnings from the coronavirus.

Global shares are on course for the worst week since the 2008 crisis, down more than 10% from this month’s peak.

“The markets are terrified that the disruption is going to hit GDP and then will hit profits at some stage,” Andrew Freris, chief executive of Ecognosis Advisory Co in London, told Bloomberg TV.

“Yesterday saw the rand come under pressure again, losing just over 1% during the local trading session, while testing a break above R15.50/$ during the overnight session, Botes said.

The rand traded at the following levels against the major currencies:

  • Dollar/Rand: R15.59 (0.67%)
  • Pound/Rand: R20.08 (0.65%)
  • Euro/Ran: R17.14 (0.62%)

Read: Has the budget done enough to keep a Moody’s downgrade at bay?

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Rand slides as Moody’s weighs in with budget concerns