Moody's Investor Service has said it may be difficult for the SA government to restrain spending in future, even as the Finance Minister Tito Mboweni announced in his maiden Budget that SA's fiscal deficit would grow to 4.5% of GDP in 2019.
This would be especially tough if economic growth remained weak, said Moody's, the sole major ratings firm to not have downgraded SA's sovereign debt to junk.
It said the Budget again highlighted South Africa’s limited fiscal flexibility, as the country faces weak growth in a challenging economic environment.
In a commentary on Thursday, the agency said debt-laden power utility Eskom would likely remain the main source of contingent liability risks, weighing on South Africa’s fiscal strength.
The comments do not constitute a ratings action.
Mboweni announced on Wednesday that Eskom would receive a R69bn support package over three years to help it honour its debts. The finance minister told journalists this essentially means the state is placing Eskom "under curatorship" and would appoint a chief reorganisation officer to watch over how the money is spent.
Moody's said it is not year clear how Eskom's unbundling - announced by President Cyril Ramaphosa in his State of the Nation Address last week - would operate financially over the medium term. It noted that electricity price regulator Nersa would announce tariff increases mid-March, and it expects additional cost-cutting measures to take place after the elections in May.
While the expenditure ceiling was hiked by R14bn in 2019 in the Budget, Moody said the country's "long track record of adherence to this spending framework" meant this would likely not weaken fiscal policy credibility.
But is said new revenue and cost-cutting measures would not be sufficient to fully compensate for a the tax revenue shortfall and financial support to Eskom announced by Mboweni, leading to a fiscal deficit of 4.5% of GDP. It also noted that SA's government debt burden was now expected to exceed 60% of GDP by 2023.
"[...] achieving and maintaining spending restraint will be challenging for the South African government, especially if growth remains weak."
Up, down or stable?
Moody's currently has SA's debt at Baa3 with a stable outlook, one notch above junk status. Were it to follow the lead of Fitch and S&P and downgrade SA to sub-investment grade, SA would be ejected from the Citi World Government Bond Index, causing an outflow of billions of rands and a loss of investor confidence.
Moody's is scheduled to issue updated ratings in March, and may wait until Nersa makes its tariff announcement to do so.