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.<\/p>\n
Lullu Krugel, chief economist and partner at PwC, says that this is a crucial issue with Moody\u2019s set to comment on South Africa\u2019s creditworthiness on 1 November.<\/p>\n
Krugel said that Moody\u2019s – which is the only ratings agency still to rate South Africa at investment grade \u2013 already has a bloated view of the country\u2019s public debt after recently adding Eskom\u2019s government-guaranteed debt obligations to those of the sovereign.<\/p>\n
“The MTPBS\u2019s downward revision on economic growth and upward revision in planned state lending will certainly push Moody\u2019s debt metrics beyond critical levels, leading to a downgrade to non-investment grade if the agency wants to maintain its integrity,” she said.<\/p>\n
“The only immediate lifebuoy would be if the agency latches on to the multiple promises of change to be revealed in February 2020.”<\/p>\n
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.<\/p>\n
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.<\/p>\n
The country has been rated below investment grade since 2017 by ratings agencies Standard & Poor and Fitch.<\/p>\n
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\u2019s World Government Bond Index (WGBI).<\/p>\n
Some positivity\u00a0<\/strong><\/p>\n On a positive note, the government has a prudent debt management process in place, said Krugel.<\/p>\n “The National Treasury uses international benchmarks for structuring its debt portfolio and remains within these limits,” she said.<\/p>\n “Interest, inflation, currency and refinancing risks are under control on accumulated debt.<\/p>\n “For example long-term, fixed rate bonds are the mainstay issuance for South Africa\u2019s borrowing needs, which protects public finances from sudden interest and exchange rate shocks. Furthermore, the majority of borrowing is done in local capital markets.”<\/p>\n Kicking into touch<\/strong><\/p>\n Krugel said the MTBPS 2019 was minister Mboweni\u2019s best ‘kick into touch’ under the circumstances.<\/p>\n “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.<\/p>\n “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.<\/p>\n “Rating agencies \u2013 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.<\/p>\n Government debt expected to rise<\/strong><\/p>\n The budget deficit is expected to widen to 6.2% of the Gross Domestic Product (GDP) in 2020, National Treasury said on Wednesday.<\/p>\n According to Treasury\u2019s Budget Review document, this is mainly due to tax revenue shortfalls, lower economic growth and the Eskom bailout.<\/p>\n \u201cIn 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.<\/p>\n \u201cOver 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,\u201d National Treasury said, adding that the primary balance will narrow over time, reaching 1.4% of GDP in 2022\/23.<\/p>\n \u201cProvision for financial support for Eskom in the current year and over the medium term amounts to R161 billion.<\/p>\n \u201cExcluding 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,\u201d Treasury said.<\/p>\n
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