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The good and bad about the MTBPS that Moody’s will watch

SA’s debt position is worsening thanks to Eskom.

Moody’s Investors Service, the only major rating agency that has not downgraded South Africa to sub-investment grade (known as junk), is expected to issue a review of the country’s credit rating on November 1.

SA is on a knife edge from losing its last remaining investment grade rating from Moody’s, which has SA’s credit rating at Baa3, the lowest investment-grade level.

Read: The Medium-Term Budget Policy Statement 2019

Mini budget in a nutshell

Already Moody’s has raised concerns about the country’s low economic growth, lack of structural reforms and ongoing support to debt-laden state-owned entities (SOEs) without cutting government spending and stabilising public finances. 

Read: National Treasury downgrades 2019 growth forecast

Moody’s is expected to hold pat before pulling the junk downgrade trigger by first revising the outlook on SA from stable to negative. But this would leave SA vulnerable to a downgrade to junk from Moody’s, which would see it join its peers S&P Global Ratings and Fitch Ratings.

The 2019 Medium-Budget Policy Statement will likely spook Moody’s, but it will find comfort in the National Treasury’s admission that the country’s finances are in a precarious position.

Read: Cost of saving Eskom continues to rise

R53bn-sized tax hole in 2019

The bad

  • South Africa’s debt-to-GDP remains the highest among its peer countries. The ongoing support to debt-laden SOEs, mainly Eskom, is blowing the country’s debt profile to higher levels. Government has made provisional support to Eskom of R49 billion to be available in 2019/20, R56 billion in 2020/21 and R33 billion in 2021/22. With the financial support to Eskom, the country’s debt-to-GDP is expected to grow from the 2019 budget (presented in February) from 56.2% in 2019/2020 to 60.8%, 57.8% vs 64.9% in 2020/2021, and 58.9% vs 68.5% in 2021/2022.
  • In a worst-case scenario, Moody’s expects the debt-to-GDP ratio to rise to 70% in the next two to three years if the government continues to support SOEs without cutting spending and stabilising public finances.
  • Despite promises from the government that there will be further details on the restructuring of Eskom’s debt during the 2019 Medium-Budget Policy Statement, there was no mention of this. Eskom is in a dire financial position, with insufficient revenue to service its R460 billion debt load and tariffs that do not allow it to recover all costs. Beyond the financial support to Eskom, the statement noted that the government is forging ahead with its plan to separate Eskom into three distinct entities (generation, transmission and distribution).
  • It will be left to Eskom management to fix the power utility and its operations, said Dondo Mogajane, the director general of the National Treasury. “Eskom is too big to fail and we will stand behind it,” he said.
  • National Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to bring discipline to Eskom’s finances, and to step up the timeline for restructuring.
  • Gross tax revenue is projected to fall short of the 2019 budget estimates by R52.5 billion in 2019/20 and R84 billion in 2020/21, reflecting the weaker economic environment and a decline in tax morality that is still haunted by the state capture years. The revised gross tax revenue for 2019/2020 is R1.369 trillion compared with the R1.422 trillion announced in the February budget
  • The combination of lower revenue and increased spending has widened the budget deficit to an average of 6.2% over the next three years.

The good

  • Finance Minister Tito Mboweni has talked tough on government expenditure and wastage across all arms of the state. Guidelines will be introduced that apply to members of the cabinet and members of provincial executives, including salary freezes at current levels; the cost of official cars will be capped at R700 000 VAT inclusive; all domestic travel will be on economy class tickets; and there will no longer be payment for subsistence and travel for both domestically and internationally.
  • Mboweni said the National Treasury will play “hardball” with tax-guzzling SOEs. Further bailouts that will be given to Eskom will be a loan, which would compel the power utility to start paying money owed back. “This will enable us to differentiate between an equity injection by the government and a loan extended with a very clear directive that the loan would be repaid.”
  • Mboweni said a dedicated liquidity office for all SOEs will be set up in the National Treasury for the purpose of assisting SOEs if they want to liquidate assets.
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The good…..the cost of official cars will be capped at R700 000 VAT inclusive????? speechless….I want to cry..no no rather burst a vein

Pravin tried it and failed. Entitlement is the order of the day.

This incredibly depressing piece of information constitutes 33% of the good news.

lol !

Talk is cheap, let’s see these measurements implemented. I’d have severely cut all of these drastically to the bone (and then some). But yeah, that would be deemed racist, un-transforming, bloody Jan van Riebeeck agent-ist, etc.

The privileges astound me. I have never been able to afford a R700k car. But I pay a serious taxes for nothing. Let me pay less tax so I can also afford a car of that price please.
What a joke of a Finance minister.

The privilege astounds me. I have never been able to afford a R700k car, but I pay taxes through my nose and get nothing for it.
No wonder the tax base is emigrating

“…Further bailouts that will be given to Eskom will be a loan, which would compel the power utility to start paying money owed back…” Read – no more handouts. Future funding will be by way of loans and not equity. These loans will however never be repaid and will sit on Eskom’s balance sheet until the next finance minister converts them back to equity again. Just kicking the can down the road. What a joke.

The good, R700k car wow really and loans to Eskom (which they will never pay).

In short, there’s nothing good at all

How can debt grow to R4.5 trillion in 3 years? Somebody is lying about more than Escom and all the SOE’s.

Just one question: What will happen if an SOE defaults on its loan agreement? Is the State going to sue itself and attach its own assets?

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