South Africa: Medium-Term Budget Policy Statement lays bare fiscal deterioration, threatening South Africa's debt ratings
November 11, 2019
The Medium-Term Budget Policy Statement (MTBPS) presented by Finance Minister Tito Mboweni on 30 October revealed the bleak state of South Africa’s public finances, with budget shortfalls projected to exceed over 6.0% of GDP over the next three years. Since February’s budget, the fiscal picture has significantly deteriorated owing to increased support to indebted state-owned enterprises; lower-than-expected revenues, due to a smaller tax base amid lackluster activity; and weaker growth prospects. While Moody’s held off from downgrading South Africa’s debt to junk on 1 November, the only one of the three credit rating agencies that has kept it at investment grade, the slow pace of reforms renders it unlikely that South Africa can restore order to its fiscal house quickly, prompting Moody’s to cut the outlook on the rating from stable to negative. Thus, rapidly deteriorating fiscal metrics and the absence of concrete policy measures to avert a fiscal crisis suggest a downgrade by Moody’s could be on the cards. This could hamper already downbeat confidence and worsen the precarious debt situation, putting more downward pressure on the rand.
In the event of a downgrade by Moody’s, the move could trigger sizeable capital outflows as rand bonds would be excluded from the FTSE World Government Bond Index, thus elevating the cost of borrowing for the government in international markets and, in turn, ramping up pressure on already strained public finances. Notably, the government downgraded its public debt forecast, and now sees it rising above 70% of GDP over the next three years versus February’s projections that it would stabilize at around 60%.
The budget deficit for this fiscal year is projected at 5.9% of GDP, revised down from February’s estimate of 4.5% of GDP. On the expenditure side, non-interest spending for the current year has shot up, mainly due to ZAR 26 billion in additional financial support to bail out state power firm Eskom, and also owing to ZAR 11 billion awarded to smaller financially-distressed state-owned companies. Meanwhile, on the revenue side, lower wages, job losses, and a fall in firms’ profitability have weighed on overall tax receipts. Consequently, the government revised down its revenue projections for the next three years, which has in turn markedly deteriorated the outlook on the budget balance.
Commenting on the implications of recent developments, Andrew Matheny and Dylan Smith, analysts at Goldman Sachs, stated:
“The weaker fiscal outlook and negative market reaction to the MTBPS lessens the conviction we hold in our forecasts for a 25bp cut by the SARB in its November MPC meeting. Additionally, it introduces risks of a more protracted (but potentially deeper) cutting cycle than our current baseline for 50bp of cuts through Q1 2020 envisages.”