Ratings agency sends wage warning to South Africa

Fitch Ratings says that government is unlikely to meet its goal of freezing public-sector wages over the next three years.

In a research note published on Tuesday (11 May), the credit rating agency said that the government’s inability to control spending would likely lead to further budgetary issues.

“Compensation of public sector workers accounts for a large share, about 35%, of government expenditure,” it said. “Ongoing negotiations on a new wage deal are likely be difficult and the government is unlikely to meet its target of agreeing on a wage freeze, leading to the risk of expenditure overruns.”

The group forecast that South Africa’s GDP growth is likely to remain below 2% due to the limited scale of planned structural reform, adding that ongoing issues such as government’s weak implementation record and electricity shortages will continue to hinder efforts.

Commenting on the release, Nazmeera Moola, head of South African investments at asset manager Ninety One, said that ratings agencies are likely to remain sceptical about government’s ability to stick to a 0% increase.

Speaking to Cape Talk, Moola said that there was also fundamental doubt around government’s capacity to boost growth.

While this was a point of concern, Moola said that the government has shown strong resolve over the last 12 months in holding the line against union demands.

All three major ratings agencies adopted cautious responses to this year’s budget, warning that the National Treasury set a challenging fiscal roadmap.

The budget deficit and public debt targets are based primarily on an economic rebound and containing the public sector wage bill. Both these drivers face significant downside risks.

The balance of factors points to imminent rating downgrades deeper into sub-investment grade, Nedbank said in a research note last week.  However, the bank’s analysts said rating agencies are likely to hold off until the public sector and Eskom wage talks have been finalised.

“S&P Global Ratings and Fitch Ratings will be reluctant to move a country with reasonably solid institutional governance and deep local financial markets below the psychological hurdle of a B rating.

“This hesitancy is likely to delay further downgrades for at least a year. Moody’s and Fitch Ratings downgraded their ratings in November 2020, which may persuade them to adopt a ‘wait-and-see’ at least until the 2022 budget.

“However, a deterioration of economic prospects would increase the chances of further downgrades during this year.”

South Africa’s expenditure reduction is anchored on containing the public sector wage bill over the next three fiscal years.

The government plans to increase the wage bill by an average of only 1.2% per year over 2021/22 to 2023/2024, while the 2020/21 wage freeze is still subject to a Constitutional Court judgement.

Public sector unions entered the wage talks with a demand of CPI plus 4%, which has resulted in a deadlock, Nedbank said.

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Ratings agency sends wage warning to South Africa