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Has the MTBPS done enough to appease Moody’s?

Current statistics are hard to ignore.

Moody’s is expected to release its statement on South Africa’s sovereign credit rating now that finance minister Tito Mboweni has delivered the medium-term budget policy statement (MTBPS).

Despite several pieces of bad news contained in this year’s statement, it is hopeful that Moody’s will not revise its current rating downwards. The strong intentions expressed by government notwithstanding, the current statistics remain hard to ignore.

South Africa’s economy is shrinking, with unemployment at a 14-year high of 27.7% (or 37.2% if the definition of unemployed is expanded to include those too discouraged to look for work).

Slow growth

The South African Reserve Bank (Sarb) announced earlier this year that SA is in a technical recession following two consecutive quarters of negative growth. Real GDP growth averaged just 1.6% per annum during 2012–2017, in contrast to the National Development Plan’s goal of economic growth exceeding 5% per annum towards 2030.

In the MTBPS, National Treasury forecasts that GDP growth will slow to 0.7% in 2018, down from 1.3% in 2017, before rising to 1.7% in 2019 and 2.1% in 2020.

The MTBPS articulates a critical aspect of overestimation of GDP in government forecasts over the past six budget cycles. What this means is that weaker growth outcomes have brought about unanticipated revenue shortfalls which go some way towards explaining the increases in government’s debt-to-GDP ratio.

Deficit widens to 4.3%, structural reforms required

Fiscal policy will remain incredibly challenged in bringing about growth in the medium term. While economists in a Bloomberg survey estimated the budget deficit at 3.8% of GDP in the current fiscal year, the MTPBS states that the main budget deficit is estimated to widen to 4.3% in 2018/19 due to fiscal slippage. This is by far the highest level since 2008.

Despite this bleak outlook, Moody’s Investors Service hosted a relatively upbeat investor conference in September. At that conference, the ratings agency said a change in SA’s rating was unlikely until at least after the national elections in 2019. The credit rating agency even said that SA’s credit rating may be upgraded, depending on certain economic reforms. This is according to a credit opinion from the agency, which importantly does not constitute any rating decision. 

The report compiled by Lucie Villa, Moody’s lead analyst for South Africa, states that: “Successful implementation of structural reforms to raise potential growth as well as stabilise and eventually reduce the government’s debt burden, including through reforms to SOEs [state-owned entities] that reduce contingent liabilities, would exert upward pressure on SA’s ratings.”

The poor financial position of SOEs has resulted in government’s guarantee portfolio totalling R670 billion. Given that these entities will find it difficult to refinance maturing debt as investors increasingly require guarantees before they will provide financing, government’s contingent liability exposure is likely to remain high. The state’s exposure increased to 64.5% in the past fiscal year from 54.4% as companies drew on the guarantees.  

The MTBPS contained little evidence of structural reforms, with additional bailouts promised to various state entities, including R8 billions of additional funding to SAA and the South African Post Office (R5 billion and R2.9 billion respectively).

Read: Bailouts for SAA, Sanral’s e-tolls and more 

The ever-growing public sector bill also remains a major concern.

Government debt

Last year the MTBPS was a red flag for SA’s credit rating with Moody’s expressing concern shortly thereafter that SA’s interest payments ratio exceeded the median of its peer ratings group. According to Moody’s, more than a third of all sovereign defaults occur when countries allow fiscal imbalances to persist, resulting in unsustainably high debt burdens. When they are no longer able to service or reduce their debt, downgrades invariably follow.

The MTBPS expects gross loan debt to increase to 55.8% of GDP in 2018/19, mainly to finance the budget deficit. The weaker rand accounts for about 70% of the R47.6 billion upward revision to gross loan debt in the current year. Debt is expected to stabilise at 59.6% of GDP in 2023/24 – at a higher level and a year later than projected in the 2018 Budget.

An estimated 15.1% of main budget revenue will be used to service debt in 2021/22 compared with 13.9% in 2018/19. The cost of servicing debt is the third-fastest growing expense in the budget.

What will Moody’s do?

Moody’s is the last of the three major credit rating agencies to keep SA’s credit rating at investment grade level. S&P and Fitch both downgraded SA to junk status last year, in response to the surprise cabinet reshuffle and an unfavourable mid-term budget in October 2017. Moody’s downgraded SA’s sovereign ratings to the cusp of junk in June 2017, warning that the country could lose its investment-grade rating if its economic and fiscal strength continued to falter. A further credit rating downgrade by Moody’s would therefore take its credit rating on South African bonds also down to junk status.

A downgrade to sub-investment grade would see SA expelled from the Citi World Government Bond Index, prompting asset managers and pension funds to sell domestic bonds. This would sharply increase the cost of debt and put further pressure on the exchange rate.

The 2018 MTBPS claims that government will maintain its spending ceiling as well as national departments’ compensation ceilings. Fiscal policy and the debt management strategy will work to mitigate risks to fiscal projections. We can only hope that the medium-term budget is sufficient to indicate to credit ratings agencies that, on his watch and in sync with President Ramaphosa, the buck finally may stop here.

Read: Can Mboweni walk his fighting talk?

Ian Matthews is head of business development and special projects at Bravura.

COMMENTS   22

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no clear downsizing of the public sector headcount, no privatisation of SAA and other SOE’s, yet more fuel levy to the RAF. No commitment to private competition within the energy sector.

IMF bailout Greek-style within 2-3 years. ANC clueless.

If the ANC led government is committed to save the country from becoming a failed state (junk status) and to revitalize the economy, extra ordinary, bold steps can no longer be ignored. Very urgent, fast tracked implementation is now crucial. The economic active world is eagerly awaiting S.A. austerity measurements being implemented as a matter of highest priority.

In demonstrating it’s absolute commitment, parliamentarians and all senior government officials (including at all SOE’s) must willingly renounce:
a) any salary increases over the next two fiscal years;
b) any bonus payments over the next two fiscal years;
c) a moratorium on new staff appointments over the next two fiscal years, except for emergency, very crucial, expert positions authorized by the responsible minister;
d) any replacement, renewal or increase of official cars, official houses security measurements and other perks over the next two fiscal years;
e) any costly, fan-fare indaba’s, functions, parties, sponsorship’s, etc over the next two fiscal years;
f) any form of fraud, corruption or wasteful and fruitless expenditure indefinitely;
g) SOE – private sector partnerships to reorganise and steer the SOE’s to operational functionality and self sustainability;
h) lowering the qualification threshold for subsidized (free) tertiary education to an annual combined income of the parents to R300 000 per annum and instituting progress standards for continued support i.e. must pass half year exams with a minimum pass rate of at least 55%, etc
i) examining, verifying and auditing of all grant payments to beneficiaries that fraudulently abuse the system;
j) utilising the SANDF, the SAPS and Correction Services in collaboration with local municipalities and local communities to clean up, restore, fix or to install proper basic services in all effected poor communities, at hospitals, schools, churches and other public places;
k) in all decision making and policy implementation to evaluate the impact on and to promote improving sensible, economical-beneficial-activity and closing down of loopholes for fraud, corruption, wasteful and fruitless expenditure.
This should go a long way to set an example, to change the culture of “don’t care” and to inspire the nation to a turn-around strategy. The world is waiting for this new dawn.

If Moody’s doesn’t downgrade now they have no credibility.

Moody’s is the most lenient of all the rating agencies. Take them with pinch of salt.

Ratings agencies are supposed to be objective, not lenient. IMHO the news emanating from this MTBPS at least warrants a move in Moody’s outlook from stable to negative. If that doesn’t happen then I agree with W_S_V that they surely cant have any credibility in the eyes of investors.

You mean politically correct, not lenient. And protective of Anglo-American interests as long as possible.

Moody’s interests are int. bankers & investors. It may appear it has appeasement with the ANC, it does not. Ratings agencies have huge obligations to notify global financial intitutions on how individual countries economies are being managed

Solid article. SAM s guess is that moodys will keep unchanged but downgrade this time next year when the lack of growth and lack of action in stealing and spending is more evident. The minister is hamstrung by a cabal of anc gangsters who are unable to stop their wholesale corruption and theft. Zar at 20 in 2020!

Yes Sam, you’re right, but how much more evidence is needed? None of these current people were under a rock during the last, well, the last many years since ANC took control.

Just because the pig has been painted blue from pink, it’s still a pig regardless of the colour. At least this finance Minster has made clear that the facts are in fact just that they are facts and the music needs to be faced.

South Africa like it or not needs the downgrade. The average voter needs to be punished for not holding their government accountable.

At least then the government will have no choice but to bring radical yet rational changes, radical being very different from the slow cooked frog South African policies have become.

It’s time that the average voter grows up after 24 years of sucking on the pigs teat, now is the time to mature and grow a set.

Bluntly put but the “bosom” of South Africa have been sucked dry by Zuma and his entourage of perverted ministers and friends

Yup….101% ZUMA (and cohorts) contagion in progress 🙁

@Tim Rice
Not just zooma, but the others as well and they continue because that’s all they know. Self enrichment by any means possible.

We have still not bottomed out yet!
The South Africa needs to be cured from tbe cANCer.

Wow. The average voter needs to be punished for voting ANC. 30% of our country’s people rely on government grants as their primary source of income, and no it is not because they are lazy, but how exactly do you further want to punish somebody that lives in a shack whose children go to schools without proper toilets and who rely on their income on the government.

Place yourself in their shoes, would you vote DA and risk losing your government grant. Yes people will leave the ANC in droves come 2019, but not to the DA my friends to the EFF, and therein lies the danger for all of us with a lighter complexion.

We will be as culpable as the corrupt ANC when this country goes pear shaped because comments like this just goes to show that the average white person does not have the ability to even remotely show some empathy for people condemed by accident of their birth to a miserable existence. I know a lot of us work very hard to look after our families and where not exactly born with a silver spoon in the mouth. But we also need to be able to recognize that relatively speaking we still got a much better start in live than somebody born to an semi litterate single mother that commutes 4 hours a day to work for 8 hours for R2500 a month…

We need to start showing empathy guys, we cannot just sit behind our high walls ranting about how rubbish the ANC is, sometimes with very thinly veiled racist undertones.

We need to reach out to our black countrymen and assit them to make progress in life. Does not even need to be financial. Transfer some social capital. You know how daunting it is for a bright kid whose mother only finished std 6 to apply for university? It is a nightmare if you have no guidance. Help somebody in that way, there are many other examples. Not talking charity.

Sorry bit of a rambling post

I’ll have far more empathy when these voters start holding their so-called leaders to account, as opposed to living off the scraps left by them after having their time to eat at the trough.

This blind loyalty is BS – you get what you vote for. If you haven’t figured this out after 24 years then it’s on your own head I’m afraid.

@Notwarren, I do have sympathy for those who are suffering. They have been brainwashed and lied to for long it’s now just normal to accept it.

The problem that you is if you give workers R100 000 a month they will probably be in more debt than what they are currently in.

Stop having kids if you cannot afford them, my son cost me R10,000 a month, if I had two kids it would cost me the same. So I’ve chosen to have 1 only because that all I can afford.

When will the sympathy come to the tax payers?

With a forecast of continuing growth in debt , yet no structural changes , and a continuation of additional funding to failing SOE,s SA is facing a bleak future , regardless of Moody,s rating decision . Clearly government is still optimistic that the public sector with its SOE,s will recover and has the ability to become the main driver of economic growth in SA . The public sector has failed dismally in this objective for the last 10 years , and the capacity and required skill sets , are simply not available in SA , unlike China, whose ideology our government uses as n blue print for obtaining success.

In SA only private sector investment can provide growth exceeding the population growth , but government does not provide the confidence the private sector requires.

Hollywood. Famous for bringing fiction to life. Take the movie Godfather. A bunch of criminals. living the life of wealth and all good things associate with that. Not coming easy. They did a lot of struggle to come that far. Comes this continent along with the same story in real life therms, not fake.

“You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” – Abraham Lincoln

Curses are like chickens, they always come home to roost.

in SA you can fool most of the people most of the time…they now listen to the EFF promising what the ANC promised in 1990

“The definition of insanity is repeating the same mistakes and expecting different results”

If the SA economy was a mathematical equation, the constant variable in all of our outcomes is the ANC.

There you go. Remove the ANC to change the outcome.

Will it happen though? No.

Agree with you, but…

Looking at our options: ANC, my guess is 60% of members, actions and decisions are faulty. EFF 90% at the least. DA 50% minimum.

In other words we’re in a lose, lose scenario, which is demoralising.

Also, more than 65% (my best guess, based on what I know) of our voters are economically illiterate and have no idea what the actual consequences of their vote are. They just vote for who they know.

Interesting point you brought up.

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