Moody's on Budget 2020 | Proposed spending restraint likely still won't stabilise debt burden

2020-02-27 21:24 - Carin Smith

Uncertainty about whether government could successfully negotiate with unions to reduce the public sector wage bill, and potential contingent liabilities from state-owned enterprises, mean risks to South Africa's budget forecasts are elevated, ratings agency Moody's said in a research report on Thursday evening, a day after Finance Minister Tito Mboweni presented his Budget 2020.

The report does not constitute a ratings action.

In his Budget announcement Mboweni unveiled a plan to cut the public sector wage bill by R160.2 billion over three years to reduce the country's deficit. 

The ANC's trade union federation ally, Cosatu, has labelled the Budget "provocative", saying that instead of a clear diagnosis of the problems facing SA, Treasury attempted to "dump the bill for industrial-scale looting on public servants".

Moody's currently rates the SA government as Baa3 negative and sees the fiscal trajectory under Budget 2020 as broadly similar to the Medium-Term Budget Policy Statement (MTBPS) presented in October 2019.

"In the Budget, the government has acknowledged that weak economic growth will weigh on revenue intake, which the government has attempted to compensate for by containing spending, particularly on the public sector wage bill," says Moody's.

"However, it avoided introducing any broad tax-increasing measures given the weak growth environment. As a result, fiscal deficits will remain wide, around 6%-7% of GDP in the next few years, which will increase the government's debt burden over the budget period."

Moody's expects that any negotiations around a moderation in public sector wages with unions will likely be challenging, given South Africa's socio-economic realities, and would represent a significant departure from the outcome of previous negotiations.

"If the government fails to contain the rise in the wage bill and compensation spending increases in line with the MTBPS, we estimate that the fiscal deficit would reach 7.5% of GDP in fiscal year 2020 and 7.1% in fiscal year 2021. The SOE sector, which has been a main source of unexpected spending in recent years, increases the risk of a wider-than-expected deficit," commented Moody's.

"Even if the government achieves its planned spending restraint, the government's projected primary deficit of 1.1% of GDP by fiscal 2022 would still be too wide to stabilise the debt burden, given weak growth projections and our expectation of a further rise in the interest bill."

The ratings agency is of the opinion that risks remain skewed toward a higher debt path, given the challenges in containing spending growth and persistent risks to growth.

Independent economist, Dr Thabi Leoka, is of the view that Moody's will likely downgrade SA to junk, if not in March, then later this year.

During a panel discussion at a post Budget 2020 event hosted by financial services firm BDO in Cape Town on Thursday, Leoka, who is a member of the Presidential Economic Advisory Council, did not seem hopeful of government having much success with the curbing of the Public Sector Wage Bill as proposed in Budget 2020.

"There is no way unions will agree to wage cuts in the public sector," she said.

She said that public sector wage increases had not been not matched by an increase in productivity.

State-owned entities need to shed their bloated staff numbers, she said, adding that that a creative way to deal with it might be to make some sort of deal with the private sector to absorb those civil servants.

Economist Wayne McCurrie, from Wealth and Investments at First National Bank, agreed during the BDO panel discussion that it is unlikely that Moody's would be satisfied with Budget 2020. Like Leoka, he foresees a Moody's rate cut to junk in either March or November this year.

He, however, finds it hard to believe that Mboweni would have come out to talk about a slower rate of public sector wage increases unless he and President Cyril Ramaphosa had already agreed with the unions on something similar behind the scenes.

For its part, Cosatu said on Thursday that the public sector wage bill is not bloated and it is "irresponsible" of Mboweni to announce a plan to address the issue when there is a bargaining process in place to address such matters.

Speaking at a post-budget briefing in Cape Town on Friday, Siphamandla Mkhwanazi, senior FNB economist, shared similar views that the budget would not "go all the way" in avoiding a downgrade.

Ratings agencies might consider efforts to cut expenditure, namely by addressing the public sector wage bill, in a positive light but the budget is still not able to push out "the eventuality" of a downgrade. "I think it will do just enough to buy us more time to push the eventuality of a downgrade out… The possibility of a downgrade still looms," said Mkhwanazi.