Budget 2018 could be enough to avoid downgrade - economist

Cape Town - Budget 2018 has made SA's projected government finances more palatable to ratings agencies and could be enough to avoid a Moody’s downgrade, according to Investec chief economist Annabel Bishop.

Moody’s is expected to deliver judgement on or before March 23.

Certain components of Budget 2018 are credit positive, in Bishop's view, especially the marked decline in projected borrowings.

Bishop pointed out that the rand gained on Wednesday on the perceived reasonable outcome of Budget 2018, "sufficient on its own not to necessarily precipitate a credit rating downgrade from Moody’s, or any of the other two key credit rating agencies (Fitch and S&P)".

"Looking forward, the expected cabinet reshuffle is the next event which could provide further support to investor sentiment and the rand," said Bishop.

SOE governance

She pointed out that credit ratings agencies have also highlighted governance of state-owned enterprises (SOEs) as a key concern.

Budget 2018 states that “in order to ensure proper governance of public entities and encourage accountability, government proposes that losses or expenditure classified as fruitless and wasteful will not qualify for a tax deduction”.

In her view, one of the most important turn arounds in Budget 2018 is that it proposes major spending adjustments and tax measures in response to what Bishop calls "the unsustainable debt outlook" presented in the October 2017 mini budget.

Together with faster economic growth, these measures serve to reduce the budget deficit and stabilise national debt as a share of gross domestic product (GDP) over the medium term, she explained.

The two major spending changes compared to the mini budget are cuts identified by a Cabinet subcommittee amounting to R85bn over the medium term, and an additional allocation of R57bn for fee-free higher education and training.

"Contingency reserves have been increased to reflect uncertainty in the growth outlook, spending pressures and the precarious finances of several state-owned companies," said Bishop.

According to National Treasury “the economic and fiscal outlook has improved since the mini budget".

Investor confidence has grown on the promise of renewed policy coordination and effective implementation. Yet the challenges highlighted in October – rising national debt, significant revenue shortfalls and the precarious financial condition of several state-owned companies – remain central policy concerns.

Bishop said these are likely to also be the sentiments of the credit ratings agencies, and Moody’s in particular may now give SA additional time to get its finances in order, instead of delivering a downgrade to junk status after this budget as was feared.

Sanisha Packirisamy, economist of Momentum Investments, agrees that rating agencies will more likely than not leave SA’s sovereign ratings unchanged, because fiscal slippage has been arrested and the government debt ratio stabilised.

Mamello Matikinca, FNB chief economist, also believes Budget 2018 will be enough to delay a downgrade by Moody’s next month.

However, FNB is concerned by the drastic shift in expenditure, which now leans more to consumption rather than capital expenditure.

"If maintained, the government could potentially be setting itself up for further downgrades down the line. Furthermore, very little detail about structural reform was evident, but we are mindful that such policies are not part of National Treasury’s mandate," said Matikinca.

"Lifting the structural constraints will require policy responses that involve all state departments and align the country’s policy trajectory with that of the National Development Plan. With an increased tax burden, it is vital that reforms which lift growth meaningfully are hastily implemented."

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