Budget 2023
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Moody's flags govt's debt guarantees as a risk

Johannesburg – Moody’s is concerned over government’s debt guarantees relative to GDP, which pose a risk to the fiscal position.

In a statement issued on Thursday, Zuzana Brixiova, senior analyst and lead sovereign analyst for South Africa, shared the ratings agency’s views on the Budget.

In his speech, delivered in parliament on Wednesday, Finance Minister Pravin Gordhan said that government debt was expected to stabilise at 48% of GDP over the next three years. He added that the budget deficit for 2017/18 was in line with Treasury’s fiscal consolidation commitment at 3.1% of GDP.

READ: State debt creeping up

Moody’s acknowledged this. “Amid challenging conditions, the 2017/18 budget sets out fiscal consolidation targets consistent with commitments in the 2016 mid-year policy statement, including a gradual stabilising of the debt-to-GDP ratio,” said Brixiova.

“While government guarantees relative to GDP are also projected to stabilise, their actual drawdowns are rising and represent increasing risks to the government’s fiscal position,” she added.

READ: No change in South Africa's credit rating - Moody's

In November last year, Moody’s kept South Africa’s sovereign rating unchanged at Baa2 with a negative outlook.

Moody's warned that if South Africa doesn't accelerate economic growth, the country risks being downgraded.

"South Africa's rating would likely be downgraded in the absence of fundamental structural reforms supporting higher and sustainable medium term growth,” said Moody’s.

“Continued accumulation of public debt and contingent liabilities in terms of GDP would also put downward pressure on ratings.”

ALSO READ: Gordhan's budget should appease ratings agencies - for now

Jeffrey Schultz, economist at BNP Paribas, told Fin24 that ratings agencies would view the budget in a neutral light. Ratings agencies may be disappointed by the fact that South Africa will only have a budget surplus by the 2018/19 – a year later than what was promised in October, explained Schultz.

Economists Herman van Papendorp and Sanisha Packirisamy from Momentum Investments said rating agencies would take comfort in government’s commitment to fiscal consolidation. However unfavourable economic conditions and the absence of bolder reform efforts could still lead to a downgrade by the end of the year.  

Fin24 previously reported that among the risks to fiscal consolidation include the macroeconomic outlook, budget execution, policy uncertainty and financially distressed state-owned companies.

* Visit our Budget Special for all the budget news and in-depth analysis.

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