Moody’s Investor Services is likely to downgrade South Africa’s sovereign credit rating to below investment grade in 2019 “unless something significant happens”, with tax collection below projections and a possible Eskom bailout on the cards, according to PricewaterhouseCoopers.
The audit and advisory firm told a media briefing on Wednesday that revenue collection in November and December 2018 “became significantly worse” and “chances are quite high” that Moody’s will cut SA’s rating to junk.
Finance Minister Tito Mboweni is expected to detail government’s support for Eskom in his budget speech next Wednesday.
The Department of Public Enterprises, meanwhile, told Parliament on Wednesday that the debt-laden power utility was is “technically insolvent” and will not last beyond April in its current state.
Tax collection deteriorates
Since the mini Budget in October, “revenue performance has deteriorated significantly,"said PwC‘s national head of tax Kyle Mandy. The South African Revenue Services is expected to collect R37bn less than forecast in last February’s Budget for 2018/2019.
The mini budget had projected a shortfall of R27bn than February, primarily due to Value Added Tax refunds backlog. PwC estimates that an additional R10bn has been added to the shortfall since then.
Mandy said this was due to a variety of issues, including personal income tax “slowing down dramatically” amid retrenchments, weaker corporate income tax due to low profitability by companies amid sluggish economic growth, and a slippage in tax compliance with governance issues at SARS.
VAT, which was raised by one percent point in April to 15% and customs duties were “performing relatively strongly”.
PwC does not expect to see significant tax increases in the upcoming budget as government has “run out of space, in respect of three main tax instruments”.
The fuel levy and excise duties on alcohol are expected to rise in line with inflation, while the levy to fund the Road Accident Fund is projected by PwC to increase by 30c/l.
PwC chief economist Lullu Krugel said it is also unlikely government will implement large expenditure cuts in an election year, which means Treasury will take on more debt to fund the growing deficit. Mboweni in October increased the budget deficit for 2018/2019 to 4% with government debt rising to 55.8% of gross domestic product.
Krugel said due to the decrease in revenue collection, PwC foresees the budget deficit rising to 4.3% in the current financial year and government debt increasing to 56% of the GDP.
If Eskom is granted a bailout, the budget deficit could rise to 5%, Krugel warned. This will increase the likelihood of Moody’s downgrading SA’s rating. Krugel said this could be done in two phases, with Moody’s first placing SA again on a negative outlook in March and then a full downgrade to sub-investment grade in October or November.
Moody’s is the last of the three major ratings agencies to still hold SA at investment grade. In March 2018, it affirmed the country’s long term foreign and local currency debt ratings at Baa3 - one notch above junk status - and revised the outlook to stable from negative.
If it were to downgrade SA to sub-investment grade - as S&P and Fitch have already done - SA would automatically be removed from the Citi World Government Bond Index, forcing asset managers to sell billions of rands' worth of SA bonds.