Runaway debt risks sending SA over a fiscal cliff, warn Fitch and Moody’s
JOHANNESBURG - Fitch Ratings and Moody’s Investor Services warned on Friday that the country risked going over a fiscal cliff following Finance Minister Tito Mboweni’s Supplementary Budget last week, which left both rating agencies unimpressed.
Fitch said the government's intention to stabilise debt levels within four years was unlikely to be achieved.
Fitch’s head of Middle East and Africa sovereigns, Jan Friederich, said the government's expectation that debt would peak at 87.4percent of gross domestic product (GDP) in 2024 was “optimistic”.
Friederich said the persistent challenges to reducing expenditure, boosting growth and insulating public finances from struggling state-owned enterprises, and the impact of Covid-19, would make it hard to stabilise debt in the medium term.
“This would require sufficient fiscal consolidation to achieve a primary Budget surplus in that year, which would be South Africa's first since 2008, towards the end of the commodity boom,” Friederich said.
Mboweni said gross national debt was projected to be close to R4trillion, or 81.8 percent of GDP, by the end of this fiscal year.
Mboweni said the Budget deficit would rise to R761.7bn, or 15.7percent of GDP, more than the 6.8percent projected in the Budget in February.
Despite this the government intends to borrow about $7billion (R120.76bn) from international financial institutions to support its response to the Covid-19 pandemic. Gross tax revenue for this fiscal year was revised down from R1.43trln to R1.12trln due to a sharp fall in tax revenue.
The government expects to miss its tax target for this year by more than R300bn or 6percent of GDP.
It aims to cut expenditure by R230bn within the next two years, and implement additional cuts complemented by small tax-raising measures.
Friederich said the planned expenditure cuts were ambitious, not least because they would significantly weaken the economic recovery, which could result in credit ratings downgrades deeper into sub-investment grade.
Fitch downgraded South Africa’s sovereign debt with a negative outlook in April on a lack of a clear path towards debt stabilisation and the expected impact of the Covid-19 pandemic on public finances and growth.
“A continued rise in government debt/GDP and failure to formulate a clear and credible path towards stabilising the government debt/GDP ratio could lead to negative rating action,” Friederich warned.
Moody’s also warned that the country risked going over a fiscal cliff, as its economic metrics remained shaky.
Moody’s said the government’s target to stabilise its rising debt would be particularly difficult to achieve in the medium term, as debt levels had escalated beyond control.
The agency added that Mboweni’s Emergency Budget had failed to usher in reforms that could put the economy on a growth trajectory.
It said the sharp contraction in GDP and revenue would eventually lead to an unmanageable debt spike.
“The speed at which the government recovers its revenue intake and is able to ultimately curb the debt trend will drive creditworthiness,” Moody’s pointed out.
“Given South Africa’s weak track record of fiscal consolidation in recent years and the weak medium-term economic outlook, debt stabilisation by 2023 will be very difficult to achieve,” the ratings agency said.