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South Africa’s financial markets may have wobbled in response to the bad news in Treasury’s medium-term budget policy statement (MTBPS) last month, but South Africans run the risk once again of seeing their glass as half empty rather than half full.
The fact is that for the next few months the country will avoid a downgrade from Moody’s Investors Service — the only agency to still have an investment-grade credit rating for SA — despite significant deterioration in official forecasts for budget deficits and debt ratios, both to concerning levels.
Moody’s took the bad news in its stride, saying in an issuers note a few days later that although the MTBPS was “a credit negative”, the risks to Treasury’s latest fiscal projections were “balanced” and its tax collection assumptions were achievable.
This means that unless there are unexpected political or economic shocks, Moody’s is on track to keep its sovereign rating for SA — together with a stable outlook — unchanged until the country’s 2019 budget in February, when it will be clear whether Treasury has managed to meet, and perhaps even exceed, its latest targets.
It also means that until then, the country will avoid the downgrade which would knock its government bonds out of the Citigroup World Bond Index, triggering damaging outflows of the foreign capital invested in domestic bonds and equities and putting further pressure on the depreciating rand.
By the same token, Standard & Poor’s analyst for SA, Ravi Bhatia, was fairly sanguine when he spoke at a conference in Johannesburg on 30 October, pointing out that although economic growth forecasts had been revised sharply down for this year and next, the expected longer-term trajectory was essentially unchanged.
He did not dwell heavily on the unexpectedly big adjustments to Treasury’s outline of higher budget deficits and increased debt issuance, or on its plans to shift to more short-term borrowing to cover rising debt costs — saying only that Treasury’s debt management strategy has always been “credible”.
Although he was careful not to give clues ahead of S&P’s next scheduled rating update on SA on 23 November, his remarks can be seen as a sign that the rating agency is likely to keep its BB rating on the country — which is the lowest given by all of the top three rating agencies — unchanged until the February budget.
Fitch, which has SA’s sovereign rating a notch below Moody’s at BB+, was more critical in its response to the MTBPS. But Fitch also signalled that it was likely to stand pat for now, while keeping a close watch on the “evolution of fiscal policy” in response to the recession, as well as political and social pressures ahead of next year’s general election.
Many analysts have been cautiously upbeat on the MTBPS, highlighting the fact that it managed to avoid raising spending ceilings despite the large revenue shortfalls projected for the next few years, as well as an unexpected R30bn overshoot in the expected public sector wage bill, which gobbles up more than a third of the budget.
The main reason for this year’s revenue shortfall was the fact that the South African Revenue Service, which was badly mismanaged under former President Jacob Zuma, is going to refund companies R20bn of value added tax — a step seen by many as a boost to the economy which is also likely to help restore business confidence.
At the same time, rather than setting aside more money for wages in the bloated public sector, Treasury shifted that burden to national and provincial departments, saying they had to absorb the costs of the pay increases within their own baselines.
Doubt has been cast over whether the strategy will succeed, but government has since said it will develop a renumeration strategy to help those departments foot the bill.
That should help avert cuts in service and capital spending which would have amounted to a form of concealed fiscal austerity — a step Treasury has said it will not take to avoid hurting the economy.
Treasury officials have also made clear that new tax increases will be avoided, although the main budget document contained a warning that fuel levies would have to rise sharply over the next few years to cover liabilities in the Road Accident Fund.
President Cyril Ramaphosa’s economic stimulus plan, funded by shifting R32.4bn of public spending, has not been seen as much of a boost for the economy — in fact, Bhatia described it as a “fiscally neutral” oxymoron.
However, the investment which SA looks set to receive over the coming months is much more encouraging for the growth outlook, with $20bn pledged at last month’s investment summit and $35bn beforehand, including $10bn each from Saudi Arabia and the UAE.
Last, but certainly not least, the country’s new and outspoken finance minister, Tito Mboweni, wields far more political clout than his predecessor Nhlanhla Nene, and will do his best to make the ANC toe the fiscal line.
The day after the MTBPS was unveiled, he warned Parliament’s finance committee that if government borrowing was not curbed fast, the country would have to approach the International Monetary Fund for a loan — something which would only be extended with painful conditions.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 8 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
