JOHANNESBURG – South Africa has until next February’s Budget by Minister of Finance Tito Mboweni to effect economic reforms and arrest its escalating debt-to-gross domestic product (GDP) ratio to avoid being downgraded to junk status.
This was the message that credit ratings agency Moody’s Investors Service delivered to South Africa on Friday following the tabling of the Medium-Term Budget Policy Statement (MTBPS) on Wednesday.
The country projects that its debt-to-GDP ratio will escalate to 60.8percent this financial year, and will most likely exceed 70percent of GDP by 2022/23.
Economists have warned that this signals trouble for the economy in about a year’s time, as reforms are slow to boost confidence, as the growth forecast has been slashed from 1.5percent to 0.5percent in 2019.
Moody’s on Friday changed the outlook on South Africa’s ratings to negative from stable and affirmed the Baa3 long-term foreign-currency and local-currency issuer ratings.
The rand took the news in its stride, holding steady at levels of about R15.02/$. The bond and currency markets had largely priced in the risk of a negative outlook already.
The ratings agency said its decision to change the outlook to negative from stable reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures.
Old Mutual Investment Group’s chief economist, Johann Els, said the MTBPS was always going to make or break South Africa’s chances of maintaining its investment grade in the absence of much detail in the Eskom turnaround plan.
“The Minister of Finance included a very realistic statement of all the problems. However, he revealed no action on the deficit, spending cuts that were too small, as well as nothing new (despite an updated economic plan published) on economic policy, and nothing yet on Eskom’s debt,” he said.
“He included mentions of spending cuts, including the wage bill, but no mention of specific action yet. Therefore, the MTBPS again reveals a statement of intent, but no action.”
Moody’s cited that no near-term upgrade back to “stable” would be considered until further improvement on South Africa’s debt situation has been physically seen, thus the likelihood of a further downgrade to “junk status” within the next year should still be considered.
Intellidex’s head of capital markets research, Peter Attard Montalto, said he thinks a credit rating downgrade may come sooner than many think.
“For now, before we have further clarity on exactly where this resolution line is for this – we think it will be a 50:50 call on a downgrade after the Budget in February – assuming the calendar date is in March, say,” Montalto said. “Finding this line, along with more clarity from Moody’s, will lead to a more definite view. Put simply we think a downgrade is very much possible now in March. The question now arises as to whether this news will light a firecracker under the government on reform and consolidation.”
Stanlib chief economist Kevin Lings said the 2020 Budget would provide a key indication of whether or not the government was committed to the fiscal consolidation recommended by the MTBPS.
“At this stage, we would conclude that the chances of Moody’s downgrading South Africa’s credit rating to below investment grade in the first half of 2020 are well above 50percent, and such a move would indicate that Moody’s sees South Africa as a greater financial risk than it did in 1994 when giving our first Baa3 rating,” Lings said.
Moody’s said despite the R150billion additional cost saving measures, the government had not been forthcoming with a credible strategy to halt, and ultimately reverse, the rise in debt.
Business Unity South Africa president Sipho Pityana said the MTBPS had fallen far short of what was needed, and urged the government to implement reforms within 18 months.
“But we can’t even wait that long as a country. We need urgent and effective interventions to cut public debt, rein-in state-owned companies and revive economic growth,” Pityana said.
“Between now and the Budget statement next February, we will have to see clear leadership from President Cyril Ramaphosa in dealing with the economic fundamentals.”