MTBPS Comment: Escalating increase in debt foreseen
JOHANNESBURG – The 2019 Medium-term Budget Policy Statement (MTBPS) projected a massive deterioration in its debt to gross domestic (GDP) projections and fiscal deficits.
Over the medium-term gross debt is not projected to stabilise, rising instead from 61 percent of GDP this fiscal year to 71 percent of GDP by 2022/23, and to 81 percent by 2027/28 on the current trajectory.
An extreme ramp-up in debt-to-GDP projections makes a Moody’s credit rating downgrade substantially more likely, and a revision to a negative outlook a certainty.
There is a very material deterioration in gross debt projections from the Budget presented in February this year, where gross debt of 55.6 percent of GDP was estimated for 2019/20, but 60.8 percent (of GDP) is now projected, the 2020/21 debt projection is now 64.9 percent (previously 56.2 percent) and 2021/22 at 68.5 percent from the previous estimate of 57.8 percent.
As the purpose of credit rating agencies in assessing the rating on a sovereign’s debt is to assess the likelihood of the sovereign’s ability to repay that debt, the massive upwards revision of South Africa’s projected debt trajectory, and lack of total expenditure cuts, make further downgrades from all the credit rating agencies much more likely.
Expenditure continues rising each year. The rand reacted negatively, weakening to R15.07/$, R16.76/€ and R19.41/£, from R14.64/$, R16.24/€ and R18.86/£ before the Budget, as the markets build in the certainty of a Moody’s credit rating downgrade. The yield on the R186 government bond rose to 8.38 percent from 8.20 percent before the release of the MTPBS.
The MTBPS is undoubtedly credit negative for the rating agencies on the back of the dramatic deterioration in the fiscal metrics, with the fiscal deficit as a percent of GDP now projected at -5.9 percent of GDP for 2019/20 (previously expected at -4.5 percent), -6.5 percent of GDP for 2020/21 (previously -4.3 percent), -6.2 percent in 2021/22 (previously -4.0 percent) and -6.2 percent in 2022/23.
While GDP growth continues to remain insufficient to halt the upwards trajectory of gross debt (a growth rate in excess of 2.5percent y/y every year is needed to assist in reversing the trajectory), and ongoing financial support to ailing state-owned enterprises, particularly Eskom, has added to the burden.
Eskom’s debt at R440 billion, or 15 percent of GDP, remains a heavy burden on the government, around R300bn of which is guaranteed by the government, which has taken on the coupon payments of these contingent liabilities, leading Moody’s to assume the Eskom debt as part of that of South Africa, lifting the sovereign debt profile.
The MTBPS also focuses on the macroeconomic reforms to restore economic growth, in an environment of a synchronised global economic slowdown which is negative for economic growth in South Africa. The National Treasury revised down its growth forecast to 0.5 percent y/y for this year (previously 0.7 percent y/y), and 1.2 percent y/y next year from 1.5 percent.
The overriding concern is the ongoing fiscal slippage as public finance figures deteriorate each year.
Yesterday’s Budget may hope for faster economic growth to turn the deterioration around, but does not realistically expect it. The 2019 MTBPS proposes measures to narrow the fiscal deficit, boost the economy and improve the quality of spending, particularly on large infrastructure projects, but already markets are seeing this as too little too late.