Finance Minister Malusi Gigaba. File Image
JOHANNESBURG - This week's medium-term budget policy statement (MTBPS) is expected to come under far greater scrutiny than usual, as rating agencies look for signs of fiscal slippage in Finance Minister Malusi Gigaba’s maiden budget speech at a time of dwindling revenue and funding prospects.

The co-head of fixed income at Investec Asset Management, Nazmeera Moola, on Friday said that there was little sign that Gigaba had the stomach to significantly cut expenditure in coming years, without meaningful fiscal consolidation.

“Both Eskom and Transnet appear to be running short on liquidity, but it is hardly surprising that these companies are unable to access financial markets locally. It would be difficult to justify investing further pension savings in the debt of institutions with questionable governance,” Moola said. 

The rating agencies have highlighted the slow pace of economic growth as a weakness to the country’s sovereign rating.

After identifying supply bottlenecks and much-needed reforms in South Africa’s highly concentrated economy,mS&P Global Ratings assessed the delivery of reform as piecemeal to date. 

Adding further pressure on the fiscus is that tax collections have undershot Treasury’s February projections.

The government had previously projected an increase in gross tax revenues of 10.6 percent in the current fiscal year, relative to the previous fiscal year. However, currently, gross tax revenues are falling short and are only tracking at 6.1 percent on a yearly basis.

Mamello Matikinca, a senior economist at FNB, said proposals for the expenditure outlook would be among the most closely watched topics, particularly funding and sustainability proposals for failing state-owned enterprises (SOEs).

“We deem it unlikely that any mention of full or even partial privatisation will be made, and the big question will be how the Treasury deals with funding the energy department’s nuclear ambitions.”

“We think the mini-budget will do enough to stave off another credit rating this year, but our core view is for another leg down in mid-2018 PPI, tourism, land transport is the second tier data due next week (this week),” Matikinca said.

President Jacob Zuma’s last week’s cabinet reshuffle gave rise to speculation that it was premised to secure a R1 trillion nuclear deal with reports suggesting that Russian nuclear agency Rosatom is the front runner to win the contract. 

Former Eskom head honcho Brian Dames last week told parliament that there was no need for new nuclear stations to be built. “We have no need for it.

Secondly, I don’t think we can afford it,” Dames insisted. Carlos Teixeira, a research analyst at Credit Suisse, said the case for further credit downgrades of the sovereign had strengthened since agencies last acted.

“In our view, potential GDP growth has declined, structural reforms are absent, and institutional decay has continued.

So despite what is likely to be poor headlines from the MTBPS, we think that the credit rating agencies will remain on hold this year,” Teixeira said.

Moody’s, in its last credit opinion on South Africa issued in August, warned that downward pressure could develop if liquidity pressures begin to re-emerge at SOEs that would elicit pronounced government intervention, be it through the activation of guarantees or other measures. 

The rating agency also said the future trajectory of the rating would depend on the government’s success in safeguarding South Africa’s institutional, economic
and fiscal strength.

Gigaba had earlier promised that he will use the MTBPS to elaborate on how the government plans to fund the cash-strapped South African Airways to stay afloat. 

Kamilla Kaplan, an economist at Investec, said achieving a stabilisation of debt ratios would partly rely on addressing the sizeable fiscal risks associated with the realisation of contingent liabilities and/or recapitalisation of SOEs.