JOHANNESBURG - Rating agency Moody’s has warned that the government’s R500billion economic recovery package could push the country’s debt burden even higher, weaken public finances, and constrain the government’s ability to support state-owned enterprises (SOEs).
President Cyril Ramaphosa last week announced a R500bn social and economic relief package to help struggling individuals and businesses deal with the impact of the coronavirus.
Moody’s said although these measures would provide essential support to cash-constrained companies, they were unlikely to boost economic growth.
The rating agency last week said the loans would push the country’s debt higher than the February forecast of R3.56trillion or 65.6percent of gross domestic product (GDP).
It also said the consolidated Budget deficit would widen further than the R370.bn or 6.8percent of GDP, forecast in February.
“The sharp widening in the deficit will push South Africa’s debt burden up 15percentage points to 84percent of GDP by the end of fiscal 2020, inclusive of guarantees to SOEs,” Moody’s said. Together with the impact of the weak economic backdrop on revenue, we now expect the government to record a Budget deficit of 13.5percent of GDP in fiscal year 2020.”
The economic recovery package consists of R130bn reprioritised from the February Budget, R200bn in loan guarantees, tax relief and deferrals measures worth R70bn.
A further R130bn would be borrowed from international financial institutions over and above the R230bn additional spending on health care and municipalities.
Moody’s said the fiscal pressures associated with the economic downturn and the support package would reduce the space the government has available to provide further support to SOEs. “Absent government support, the financial strength of SOEs will likely deteriorate in the coming quarters, exacerbating economic difficulties,” Moody’s said.
The SOEs have been a key source of the government’s spending pressure, with the February Budget allocating R67bn towards them for 2020.
The government is also at loggerheads with the business rescue practitioners of SAA over providing them with R10bn in funding to rescue the bankrupt airline.
Finance Minister Tito Mboweni last week said the government would provide financial support to the Land and Agricultural Development Bank after it defaulted on its domestic bond notes totalling about R50bn.
Investec’s chief economist, Annabel Bishop, cautioned that looking at additional expenditure measures to provide support during the Covid-19 crisis risked elevating the debt metrics.
“I must stress that breaking the spread of Covid-19 is paramount and that the cost to South Africa would be even greater if we did not flatten the curve,” Bishop said.
“South Africa’s credit ratings face further downgrades, and it is imperative that government spending be contained to prevent further slippage down the rating ladder, and its eventual application to the International Monetary Fund to come under its adjustment programme in order to access funding.”
Moody’s, which downgraded South Africa’s credit ratings to sub-investment, slashed the country’s GDP forecast further for this year than its downward revision of -2.5percent earlier this month, as the Covid-19 crisis weighed on economic activity.
“The support measures are unlikely to prevent a sharp economic contraction this year. We currently forecast GDP will contract 6.5percent in real terms in 2020, before recovering by 4.5percent in 2021,” it said.