Supplementary Budget 2020

This year's Budget will be all about avoiding Moody's downgrade, say economists

How government plans to reduce its debt, cut its deficit, and achieve the R150 billion in savings that Finance Minister Tito Mboweni promised in his medium-term budget statement in October will determine whether South Africa remains an investment grade country or not after this year’s Budget, say economists.

Mboweni is due to table the 2020 Budget on February 26. It is arguably one of the most challenging a South African finance minister has had to deliver, with the country one notch away from losing its last remaining investment grade rating from a major ratings agency. 

Risk of downgrade elevated

Moody’s, the only one of the three major credit rating agencies to not already have downgraded SA to junk, revised the country’s outlook to negative in November. A negative outlook indicates that a downgrade is planned.

S&P Global Ratings, which along with Fitch downgraded SA to junk in 2017, also revised its outlook for the country to negative last year, while Fitch affirmed its negative outlook.

Mboweni is going into this year’s Budget with SA's worst ever debt-to-GDP outlook, following the state's commitment to provide more financial support to Eskom last year. Projections in the MTBS show that the debt-to-GDP ratio is expected to breach the 70% mark in 2022/23 and rise to 80.9% by 2027/28 if no fiscal consolidation takes place.

The state-run power utility has about R450bn of debt, and is not earning enough from electricity sales at current prices and volumes to pay off the interest on the debt without state aid. 

"In order to avoid a downgrade, the budget needs to lower its debt projections, from an unsustainable 71% of GDP in 2022/23 to likely below 60% of GDP in the medium-term, a hard ask given that the current fiscal year is anticipated at 60.8% of GDP already," said Investec chief economist, Annabel Bishop.

"We believe some fiscal consolidation will occur, but it is uncertain whether it will be enough to return the outlook on SA’s credit rating back to stable," she added.

In his State of the Nation Address on Thursday, President Cyril Ramaphosa said that SA's sovereign debt was heading towards an "unsustainable" level. South Africa is also facing its highest unemployment rate since 2008, moribund economic growth and gloomy business confidence levels. 

The president announced that Mboweni would "outline a series of measures to reduce spending and improve its composition," without providing specifics. 

"Low levels of growth mean that we are not generating enough revenue to meet our expenses. Our debt is heading towards unsustainable levels, and spending is misdirected towards consumption and debt-servicing rather than infrastructure and productive activity," said Ramaphosa. 

A further downgrade of SA's sovereign debt by Moody's into sub-investment grade will be even more detrimental to the country’s debt-to-GDP ratio, as it would likely substantially weaken the rand and increase government’s borrowing costs.

If Moody's does cut the country's credit assessment, SA would be excluded for the major FTSE World Government Bond Index, which analysts predict could trigger outflows of as much as R150 billion from the rand-bond market. 

Will Mboweni cut the public sector wage bill?

Mboweni has promised to stabilise SA’s debt-to-GDP ratio through government savings in excess of R150 billion over the next three years. These savings will come from reducing the public sector wage bill, additional taxes and disposal of some of the state-owned companies’ non-core assets and opening room foe private-sector participation. He said the final adjustments will be announced in the 2020 Budget.

"The risk is that government does not cut back on planned current expenditure – chiefly civil servants above inflation remuneration – and instead hikes taxes to increase revenue collections, thereby sentencing the economy to even weaker growth," said Bishop.

On Thursday Ramaphosa announced that the state was "engaging with labour and other stakeholders on measures to contain the public wage bill and reduce wastage," but did not provide details. 

Expect sombre economic growth outlook

SA’s growth outlook is already poor, with the World Bank forecasting growth of just 0.8% for 2020. FNB economist, Matlhodi Matsei, said the bank expects National Treasury to also revise its GDP and inflation forecasts downward in line with the latest available data.

"Since the 2019 MTBS, household consumption expenditure and fixed investment have exhibited some weakness, which bodes ill for GDP growth. Furthermore, inflation has surprised to the downside," observed Matsei.

He said notwithstanding the belt-tightening that Mboweni promised, Budget deficits over the medium term would probably be higher than initially anticipated, as tax revenues are likely to be lower than Mboweni estimated last year.

- Additional reporting by Jan Cronje

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