Has Mboweni managed to still Moody’s knife?
The budget has done the right things argue analysts, but SA's deficit and debt trajectory will still weigh on its credit rating
The big question after finance minister Tito Mboweni’s budget on Wednesday will be how ratings agency Moody’s Investors Services views the limited fiscal consolidation outlined in the numbers, despite the government’s efforts to tackle its wage bill and boost growth.
Though the state is proposing R160bn in wage cuts — as part of overall spending reductions of 260bn — the budget deficit and debt trajectory have continued to rise, not least because economic growth has continued to disappoint.
In the face of poorer growth outcomes, the Treasury opted not to increase taxes such as VAT, and underscored economic reforms being introduced to boost growth, including overhauling electricity supply as well as other network industries such as ports and rail.
Some analysts believe that much will depend on what happens between now and Moody’s scheduled review on March 27, most importantly how discussions between labour and the government progress. Others, however, warn that the continued escalation of government debt increases the likelihood that SA could lose its last investment grade rating
Moody’s rates SA’s debt at one notch above non-investment grade, though its ratings outlook is negative. The Treasury warned in the budget review that the “risk to SA’s remaining investment-grade credit ratings has become more pronounced”.
“Moody’s will view the strong signal of a commitment to addressing the real fiscal problems, rather than to find plasters, positively,” said Standard Bank economist Elna Moolman.
“This budget was about doing the right things — addressing the elevated wage spending, and shifting the spending balance towards capital rather than consumption. In other words spending on infrastructure rather than wages,” she said.
“However, I’m concerned about debt not stabilising during the medium-term, which still points to SA likely losing its only remaining investment grade rating,” Moolman said.
The biggest challenge with the budget is that the whole fiscal framework rests on an agreement with labour over wages, said Michael Sachs, adjunct professor at the Southern Centre for Inequality Studies at Wits.
“I don’t see any path to consolidation, even with the spending cuts,” said Sachs.
“The emphasis is very much on expenditure containment and that is where the political obstacles are much bigger.”
According to PwC economists Lullu Krugel and Christie Viljoen, Moody’s will welcome efforts to rein in the public sector wage bill, and the reforms outlined to help kick-start economic growth.
But the realities are that economic growth forecasts have been revised lower, while the budget deficit “is ballooning”, public debt is rising and there is “little prospect” of the trajectory looking any better come the medium-term budget policy statement later this year, they said.
Moody’s could wait until its next review scheduled for November before it makes a decision, but “irrespective of the exact timing”, the loss of SA’s investment grade rating is “quite certain to happen”, they said.
Correction: February 27 2020
An earlier version of this story incorrectly stated that Moody’s rates SA’s debt at one notch above investment grade, when in fact it rates it at one notch above non-investment grade.