It is a limited pro-growth Budget, but debt projections rise and fiscal deficit projections widen, both as a percentage of gross domestic product (GDP). This is a worry from a ratings perspective as Moody’s recently warned against rising debt projections - specifically, gross debt is now to stabilise at 59.6 percent in 2024/25 versus a projected stabilisation at 56.2 percent of GDP in 2022/23 in the February 2018 Budget.
The rand has reacted negatively to this, weakening to R14.47/$, R16.49/ and R18.69/£, from R14.18/$ before the Budget, as market expectations of a good-news Budget fades.
The risk has risen of a Moody’s downgrade to South Africa’s sub-investment grade for South Africa's duel rating - both local and foreign currency long-term sovereign debt.
The 2018 MTBPS is likely to be seen as credit negative due to the slippage in previously planned fiscal consolidation, but the MTBPS does take into consideration recent events, such as the weak economy, lowering its GDP forecast, and tax revenues have been revised down with higher value VAT refunds, but at least the expenditure ceiling is intact.
The MTBPS states that “the resources available cannot be substantially expanded without faster economic growth and job creation”, and that public sector “governance failures and corruption have harmed public service delivery”, in an environment where “poor economic performance in the first half of the year has put additional strain on the public finances”.
“Fiscal options have become increasingly limited, and higher revenues need to flow from a broad-based economic expansion.
“Accordingly, this MTBPS prioritises three interlinked policy areas: improving governance and financial management in national, provincial and local government departments to support service delivery.
“Implementing the president’s economic stimulus and recovery plan, particularly by encouraging private-sector investment. Reforming state-owned companies. Improving the financial health of the major state-owned companies will take time, but measures are being taken to strengthen governance.”
While the focus on economic growth, business confidence and infrastructure investment is needed, it has come alongside a projected deterioration in government finances at a time when Moody’s has warned against the latter, and the other two key rating agencies have South Africa on sub-investment grade.
The MTBPS says “some state-owned companies receive funding in the current year, their poor financial position could burden the public finances over the medium term”.
However, Moody’s recently released a regular update on its credit opinion of South Africa, warning of a rating downgrade if South Africa fails to stabilise its debt, lift economic growth or/and sees an increase in the likelihood that state-owned enterprises' (SOEs) contingent liabilities will lift its sovereign debt burden.
On the positive side, the strong commitment to tackling corruption, repairing governance of key SOEs and of weakened state institutions, along with a determined focus on improving economic growth, boosting business confidence and infrastructure expenditure, will be credit-positive, and in that, argue against a Moody’s downgrade.
A close call for South Africa.
Annabel Bishop is the chief economist at Investec.