Finance minister Tito Mboweni’s medium-term budget policy statement (MTBPS) shows that the risk of a ratings downgrade has increased due to low economic growth and rising public debt.
Lullu Krugel, chief economist and partner at PwC, says that this is a crucial issue with Moody’s set to comment on South Africa’s creditworthiness on 1 November.
Krugel said that Moody’s – which is the only ratings agency still to rate South Africa at investment grade – already has a bloated view of the country’s public debt after recently adding Eskom’s government-guaranteed debt obligations to those of the sovereign.
“The MTPBS’s downward revision on economic growth and upward revision in planned state lending will certainly push Moody’s debt metrics beyond critical levels, leading to a downgrade to non-investment grade if the agency wants to maintain its integrity,” she said.
“The only immediate lifebuoy would be if the agency latches on to the multiple promises of change to be revealed in February 2020.”
According to the MTBPS economic growth is now projected at 0.5% for 2019 as long-term growth estimates have fallen. As a result, revenue projections have been sharply reduced.
The current account deficit is expected to remain at 3.5% of GDP over the next three years, reflecting low import growth due to weaker domestic demand.
The country has been rated below investment grade since 2017 by ratings agencies Standard & Poor and Fitch.
Should Moody’s also downgrade South Africa to junk status, the country would no longer be eligible for inclusion in debt gauges such as Citigroup Inc’s World Government Bond Index (WGBI).
On a positive note, the government has a prudent debt management process in place, said Krugel.
“The National Treasury uses international benchmarks for structuring its debt portfolio and remains within these limits,” she said.
“Interest, inflation, currency and refinancing risks are under control on accumulated debt.
“For example long-term, fixed rate bonds are the mainstay issuance for South Africa’s borrowing needs, which protects public finances from sudden interest and exchange rate shocks. Furthermore, the majority of borrowing is done in local capital markets.”
Kicking into touch
Krugel said the MTBPS 2019 was minister Mboweni’s best ‘kick into touch’ under the circumstances.
“In team ball sports like rugby and soccer, kicking into touch can take a lot of pressure off a team. It delays the immediate threat of a pressured encounter and relieves pressure on the players,” she said.
“However, while relief can help in staging a better offensive manoeuvre, kicking into touch can also backfire in that the opposing team counters with their own tactics. Minister Mboweni has many opponents in trying to realise the processes made for Budget Speech 2020.
“Rating agencies – some might call them the referees in this game – are likely to be unpleased with the MTBPS kick, thereby building the pressure on the National Treasury heading down the road to February 2020,” the economist said.
Government debt expected to rise
The budget deficit is expected to widen to 6.2% of the Gross Domestic Product (GDP) in 2020, National Treasury said on Wednesday.
According to Treasury’s Budget Review document, this is mainly due to tax revenue shortfalls, lower economic growth and the Eskom bailout.
“In 2019/20, the main budget deficit is estimated to widen to 6.2% of GDP compared with the 2019 Budget estimate of 4.7%, mainly due to lower nominal GDP, tax revenue shortfalls and financial support for Eskom.
“Over the next two years, lower revenue, additional financial support for Eskom and higher debt-service costs widen the main budget deficit by an average of 2.2 percentage points,” National Treasury said, adding that the primary balance will narrow over time, reaching 1.4% of GDP in 2022/23.
“Provision for financial support for Eskom in the current year and over the medium term amounts to R161 billion.
“Excluding these provisions for Eskom, the main budget primary deficit improves by 0.9 percentage points to 1.4% of GDP in 2019/20, and narrows to 1.1% of GDP in 2022/23,” Treasury said.