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Ratings agencies not convinced by Mboweni’s plan

A Moody's sign on the 7 World Trade Center tower is seen in New York in this August 2, 2011 file photograph. (Picture: Reuters/Mike Segar)

A Moody's sign on the 7 World Trade Center tower is seen in New York in this August 2, 2011 file photograph. (Picture: Reuters/Mike Segar)

Published Nov 1, 2020


JOHANNESBURG - Ratings agencies have poured cold water on the government’s ability to rein in spending, warning of further downgrades if the government’s finances continued to deteriorate.

Moody’s said that Finance Minister Tito Mboweni’s plan to contain growth in public sector salaries at 1.8 percent was likely to be met with resistance from the unions.

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“The government expects further cuts on the wage bill beyond 2020, but negotiations with social partners will be difficult,” Moody’s said in a note.

On Wednesday, Mboweni committed the government to rein in spending during his Medium-term Budget Policy Statement (MTBPS). Mboweni said the government would freeze the public wage bill for three years as part of substantial cuts to its non-interest expenditure projections amounting R300 billion to avert a looming debt crisis.

The cuts would amount to R199bn in the next two years to offset the R40bn increase in debt service costs.

Mboweni also projected a further deterioration in government’s debt to gross domestic product (GDP) projections and fiscal deficits.

He said debt levels would escalate more than expected in the next five years, rising from R3.97 trillion, or 81.8 percent of GDP, to R5.5 trillion, or 95.3 percent of GDP in the 2025/26 fiscal year as fiscal metrics deteriorate.

Lower real and nominal growth has added to the pressure on significantly stretched public finances as the GDP is forecast to contract by 7.8 percent this year.

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Mboweni said the government was not expecting a negative reaction from ratings agencies. He said the government did not expect any further credit downgrades given that the government was doing whatever it could in a difficult situation.

However, the ratings agencies were not convinced. Fitch said the freeze of public sector wages would likely face strong opposition from labour unions.

The agency said the success of the plan would depend crucially on difficult negotiations with unions.

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“Tensions within the governing African National Congress will also hamper policy-making and exceptionally high inequality raises social pressure for additional spending,” Fitch said.

Fitch, which rates South Africa’s debt at BB with a negative outlook, added: “Despite the Economic Reconstruction and Recovery Plan released by the president, Cyril Ramaphosa, in mid-October, growth will remain weak.”

Treasury cut its growth forecasts for 2020 to a 7.8 percent contraction, while the budget deficit was seen widening to 15.7 percent of GDP. Investec’s chief economist Annbel Bishop said the MTBPS was not a full austerity budget, but contained a notable shift in expenditure from consumption to infrastructure investment.

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Bishop said the test would however be on the implementation.

She said the rating agencies were likely to downgrade South Africa on the back of this budget.

“While these expenditure cuts are largely in line with the expectations from the markets, it does not nullify the massive rise in South Africa’s future debt quantum announced in June,” said Bishop.

Mboweni said the ratings agencies would have to decide on their views based on the true picture of the country’s balance sheet.

He said his MTBPS attempted to stabilise debt to avoid significant expenditure reductions across government, including possible pay cuts to management-level positions across national, provincial and municipal governments, state-owned entities and all other senior public representatives. Bishop said the MTBPS, however, showed that fiscal consolidation remained elusive with South Africa moving ever closer to an unsustainable debt trap.

“The rating agencies may avoid downgrading SA by two notches at their country reviews on 20th November this year, but not enough has been done overall to comfortably avoid a one notch downgrade, especially as both Moody’s and Fitch already have SA on a negative outlook,” Bishop said.

Anchor Capital’s Nolan Wapenaar said the allocation of R10.5bn bailout to SAA was a worrying factor about the country’s fiscal consolidation.

“In our view, this sets an uncomfortable precedent with regards to the government’s handling of problematic SOEs (state-owned enterprises),” Wapenaar said. “Interestingly, the Land Bank received a further R7 billion bailout, which is sizeable when considered against the recent R3 billion bailout of the same entity.”