Skeptical Moody's sees SA debt burden rising

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Moody's published a research report on the budget tabled this week. Photo: Getty Images
Moody's published a research report on the budget tabled this week. Photo: Getty Images
  • Ratings agency Moody's noted that although government's deficit forecasts have been revised lower, the country can't avoid a rising debt burden over the next three years.
  • Moody's raised concerns that of a slower pace of fiscal consolidation – due to higher spending related to wages and interest.
  • It noted that government's decision to withdraw tax raising measures of about R40 billion in the next four years has slowed the pace at which the deficit will shrink.

Ratings agency Moody's is not convinced that government will be able to toe the line when it comes to spending and sees the debt burden rising over the next three years.

Moody's on Friday issued a research report on the recently tabled national budget. The ratings agency has South Africa rated at sub-investment grade Ba2, with a negative outlook.

It noted that government had lowered the deficit forecasts, given higher-than-expected tax revenue collections in the latter part of 2020 and a milder contraction to GDP. But it viewed the adjustments as "modest" and unable to arrest the growing debt burden.

According to the budget review, government expects the debt-to-GDP to stabilise at 88.9% of GDP in 2025/26. Treasury sees the consolidated budget deficit reaching a record 14% of GDP (compared to 15.7% forecasted previously) in the 2020/21 fiscal year and expects it to narrow to 6.3% of GDP in 2023/24.

Currently, debt servicing costs account for 13.4% spend in the budget or about R270 billion – arguably crowding out spend for social services like health and education.

Despite a lower deficit forecast, Moody's still sees government's debt burden reaching 100% of GDP by 2024.

It warned of a "slower pace of fiscal consolidation and wider deficits" due to expectations of higher primary spending - like wages - and interest spending. "Moreover, uncertainty over the pace of the economic recovery and the capacity of the government to limit spending (especially interest payments and support to state-owned enterprises) remains elevated," the report read.

It added that the pace of the reduction in deficits is slower, given government's decision to withdraw some tax-raising measures, and a milder recovery in revenue.

Finance Minister Tito Mboweni on Wednesday announced that tax proposals to raise R40 billion in revenue over four years would be withdrawn to support the economy and ease the pressure on households and businesses.

Overspending a risk

Moody's also highlighted risks such as uncertain developments of the pandemic – such as new variants and the pace of vaccination.

"Second, the government risks overspending," the report read. Moody's noted support to state-owned enterprises increased only marginally – but the sector, especially power utility Eskom, pose "significant" contingent-liability risks.

As for higher wages – Moody's said it ha already pencilled in stronger growth in that area than government had. It referenced the December labour court ruling, as allowing government to limit wage bill increases to 2% this year.

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