Supplementary Budget 2020

Mboweni’s Budget unlikely to stop SA’s march to junk, say economists

Finance Minister Tito Mboweni’s Budget this week is unlikely to convince Moody’s Investors Service that he has a credible plan to rein in government debt.

Of 19 economists surveyed by Bloomberg this month, 14 expect Moody’s to downgrade the country to junk this year and nine of those say it’ll happen in the first half. That’s after the ratings company in November cut the outlook on the nation’s assessment to negative and said it would look to the February 26 budget for a feasible strategy to contain rising debt.

Bailouts for state-owned companies including Eskom and South African Airways have pushed up government debt in an economy that’s growing at less than 1% a year and not collecting enough revenue.

Pledges by Mboweni to lower spending will be difficult to push through, even after President Cyril Ramaphosa said in his state-of-the-nation address the minister will outline measures to reduce expenditure and improve its composition. Labour costs make up 35% of spending and trade unions have ruled out a review of an existing three-year wage agreement that expires in 2021, saying they won’t accept pay cuts in the next deal.

Nothing will be done to limit the growth in the wage bill, according to Johann Els, chief economist at Old Mutual Investment Group in Cape Town.

“While I expect Treasury to make an attempt to get the deficit under control and to try and stabilize the debt ratio, I think it is unlikely that they will be able to do enough to prevent a Moody’s ratings downgrade,” he said.

The income side of the budget also won’t solve the problem. Revenue collection is forecast to undershoot for the sixth straight year and the minister’s scope to plug the gap by raising taxes is limited by slow economic growth and an unemployment rate near 30%. Only five of the economists surveyed said they expect an increase in the value-added tax rate.

After leaving personal income-tax brackets unchanged and not adjusting them for inflation in the last budget, Mboweni’s remaining options to increase revenue include adjusting capital-gains tax, levies on fuel and luxury goods, excise duties and charges on sugar-sweetened beverages.

“Increasing the tax burden on the economy, as well as cutting government expenditure at the same time, will have a very negative bearing on economic growth,” said Danelee Masia, a senior economist at Deutsche Bank. “Relying mainly on tax measures to narrow the deficit, as has been done in the past, has become counterproductive.

”That all means the budget deficit could be even wider in the year through March 31 than Mboweni projected in October. According to the median estimate of 24 economist surveyed by Bloomberg, the shortfall for this year will be a decade-high 6.3% of gross domestic product and will widen to 6.4% in 2020-21.

Moody’s is scheduled to announce its assessment of South Africa on March 27. A downgrade would leave the country without an investment-grade ranking for the first time in 25 years. That would cause it to fall out of the FTSE World Government Bond Index, which could prompt a debt selloff and outflows of as much as $15 billion, according to Bank of New York Mellon Corp.

While the headline figures in the budget speech will be important, signals from Mboweni that the government has feasible plans to stem the debt and deficit metrics over the medium to longer term “will probably prove more powerful than the near-term deterioration we expect to see in the numbers,” said Jeffrey Schultz, a senior economist at BNP Paribas South Africa. However, that’s unlikely to prevent a junk rating.

“South Africa’s urgent need for vital structural reform to raise the current trends in potential and nominal GDP is clear,” he said. “As this is likely to take longer to get right than many anticipate, we maintain that a Moody’s rating downgrade is inevitable in 2020.”

What Bloomberg’s economist says

“We expect modest changes to the economic and fiscal forecasts. The big question is whether the government will take action to stabilise debt. We think political constraints mean it won’t do anything meaningful. As such, Moody’s will probably place the country’s sovereign rating on review for a downgrade in March.” - Boingotlo Gasealahwe, Africa economist

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