Moody’s Raised Its Concern about lack of Details in Mboweni’s Mid-term Budget

Ratings agency Moody’s warns that despite finance minister Tito Mboweni’s talk of driving economic reform and cutting government spending, South Africa’s economy is likely to remain flat, and economic change to be slow.

In a review of the 2020 medium-term budget policy statement (MTBPS) presented by the finance minister this week, the ratings firm flagged one major overarching concern with the budget: a lack of detail around implementation.

“Although the government’s focus remains on structural reform and fiscal consolidation, this year’s MTBPS, like last year’s, does not outline how and when it will implement policies to boost growth and arrest the deterioration in public finances.

“As a result, we expect the economy will remain subdued and for fiscal consolidation to be slow, sustaining the rise in government debt in the next couple of years,” Moody’s said.

From the emergency budget tabled in June, through the various announcements of economic recovery plans and ways forward for South Africa, ratings firms, analysts, investors and economists have all raised the same questions around implementation.

“The MTBPS provides little additional detail on the implementation of structural reforms that would boost economic activity sustainably,” the ratings firm said, noting that the budget presented nothing new.

“The government’s fiscal strategy remains broadly unchanged,” it said.

As such Moody’s forecasts for South Africa are worse than those contained within the MTBPS:

  • Based on higher than projected interest and primary spending, it forecasts deficits that are around 2.5% of GDP wider than the MTBPS in each year from 2021 onward.
  • In total, it forecasts debt-servicing costs will reach 6.6% of GDP by fiscal 2022, compared to the government’s expectations of 5.6%.
  • At that point, the average interest rate on debt would reach 7.8%, exceeding the growth in nominal GDP (5.6%).
  • As a result, South Africa would need a 2.5% primary surplus to stabilise debt-to-GDP, compared to our projection of a 4.7% primary deficit.

“The authorities propose to contain spending where possible. In fiscal 2020, it will contain growth in public sector salaries at 1.8%, which is below inflation and the rate set under the three-year agreement on public sector wages running for fiscal years 2018-2020,” Moody’s said.

While government expects further cuts on the wage bill beyond 2020, the ratings firm said negotiations with social partners will be difficult.

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