Ballooning debt casts a dark shadow over SA
Moody’s downgrade feared due mainly to giving R23bn a year to teetering power utility Eskom
Finance minister Tito Mboweni painted a bleak picture of SA’s ballooning debt as he announced a massive cash injection into embattled state-owned entity (SOE) Eskom.
The debt to GDP ratio, which compares the country’s sovereign debt to its economic output for any given year, has increased 0.2 of a percentage point from the medium-term budget policy statement in October.
The budget deficit is projected to narrow from 4.2% of GDP in 2018-2019 to 4% in 2021-2022. Gross debt is expected to stabilise at 60.2% of GDP in 2023-2024. This is a huge jump from 27.8% in 2008, before the global financial crisis.
“Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls. The deteriorating financial position of state-owned companies has put additional pressure on the public finances,” the Treasury said.
In response, the Treasury has proposed a reprioritisation of expenditure and tax measures to contain the budget deficit and stabilise debt. Since the medium-term budget policy statement, the government has revised its baseline expenditure down by more than R40bn over the next three years.
This, however, has been more than offset by allocations to Eskom to the tune of R23bn a year for the next three years, in an attempt to support the urgent operational changes planned and a new infrastructure fund. The cash injection into Eskom will come with strict conditions, including placing a chief re-configuration officer in the SOE.
“There is no question about giving them money without supervision. What we’re doing is placing them under curatorship,” Mboweni said.
Analysts are at odds over whether the dismal figures will necessitate a credit-rating downgrade. Moody’s Investors Service is the last of the major rating agencies that has SA above investment grade.
BNP Paribas economist Jeff Schultz said the budget will leave Moody’s with little choice but to change SA’s outlook to negative in the next two weeks.
“The numbers are more realistic, but ultimately show that SA will breach the 60% threshold, which will be of significant discomfort to Moody’s. There are some good turnaround strategies, but unfortunately SA does not have a good enough track record of implementation to stave off Moody’s,” Schultz said.
“The figures are worse than what we’d expected. We hadn’t expected such a large injection into Eskom right now. We’re worried that they committed a large portion of funds into the entity without clear insight into the impact of the turnaround strategy,” he said. However, Mboweni said the practical measures to fix Eskom should be seen as a credit positive.
Moody’s is likely to adopt a “wait and see approach” until after the national election, said Old Mutual Investment Group chief economist Johann Els.
“There wasn’t an alternative without losing our investment grade rating,” he said.
Alexander Forbes chief economist Isaah Mhlanga described it as a structural reform budget, which aims to reduce the immediate fiscal and economic risks posed by Eskom and other SOEs’ unsustainable balance sheets and operational models.
“These decimal point deteriorations in (the) fiscal numbers, in our view, are a necessary slippage to allow reform packages that will create a more stable and predictable operating environment,” Mhlanga said.
The medium-term budget was a precursor for the weaker fiscal outlook in the 2019 Budget. In October, the Treasury outlined a deterioration of fiscal ratios from the 2018 budget expectations, projecting the main budget deficit at over 4% of GDP over the medium-term, with debt stabilising at an elevated 59.6% of GDP only in 2023-24.
“There is limited scope for meaningful consolidation over the medium term that would gradually bring the deficit and debt levels towards the international benchmarks of sustainable and prudent targets of 3% of GDP and 40%- 55% of GDP respectively,” Investec economist Kamilla Kaplan said.