South Africa: Moody’s skeptical over new budget which sees fiscal deficit widening to 28-year high
In the annual budget presentation on 26 February, the government presented spending plans which sees the budget deficit ballooning to 6.8% of GDP in FY 2020–2021, its largest in almost three decades. Initially, markets reacted positively to the announcement, although optimism evaporated soon after Moody’s, which is scheduled to review the country’s last investment grade-rating on 27 March, questioned the feasibility of proposed measures and as the country declared a “state of catastrophe” owing to the mounting challenges posed by the Covid-19 pandemic.
The announced fiscal consolidation measures proved unconvincing as they focus entirely on a ZAR 160 billion cut to public wages over the next three years, which has put President Cyril Ramaphosa on a crash course with the labor unions that make up a large portion of his political base. Moreover, the planned budget fails to stabilize the increase in public debt, which is projected to reach 72% of GDP by FY 2022–2023, while also offering little guidance on the additional financial support desperately needed by state-owned utility company Eskom and South African Airways.
Looking ahead, the economic challenges posed by the Covid-19 pandemic will most likely fluster the government’s fiscal projections this year. This, coupled with the increasing likelihood of a credit downgrade by Moody’s later this month, is likely to exacerbate the deterioration of the public accounts ahead.
Regarding the fiscal balance and the outlook for the economy, Chris Turner, an economist at ING, noted:
“South Africa’s investment grade status with Moody’s hangs by a thread. We think the market will want to see >ZAR150 billion of savings over a three-year horizon and signs that the projected debt-to-GDP ratio is stabilising around the 70% area (versus 80% in the October update) such that a downgrade is avoided. USD/ZAR could briefly correct back to the 14.85 area (should external conditions allow it). But with equities still fragile and the virus fallout on Chinese commodity demand still fully to be seen, we’re happy with a 15.50 target for USD/ZAR over coming months. A formal downgrade and SAGB eviction from benchmark indices is not our baseline, but if so sends USD/ZAR to 16.”