Moody’s sceptical of SA’s debt consolidation plans

Ratings agency Moody’s Investors Service expressed scepticism that SA could achieve its debt stabilisation aims outlined in finance minister Tito Mboweni's supplementary budget on Wednesday.

In a statement late on Thursday evening Moody's said that “stabilising debt by 2023 in line with the government's target laid out in this budget will be very difficult to achieve given the challenging growth outlook and fiscal rigidities”. 

The comment follows the sobering assessment of SA's finances delivered in the budget, where Mboweni outlined the dire need to rein in soaring debt levels, which are now expected to hit 81.8% of GDP by the end of this fiscal year.

The shock of the Covid-19 pandemic and the lockdown measures to slow its spread saw the Treasury dramatically reduce its forecasts for economic growth. It expects the economy to shrink by 7.2% in 2020.

The slowdown in growth is expected to exacerbate difficulties in collecting revenues, with the tax shortfall now expected to be  R300bn more than what was forecast in February's national budget.

But through a mix of R230bn in spending cuts over the coming two years and R40bn in unnamed revenue increases  — the state aims to see debt peaking at 87.4% in 2023/2024, and then declining thereafter.

The spending cuts come on top of R160bn in cuts to the public sector wage bill announced in February — a move that has pitted the state against public sector unions.

More detail on the ambitious reductions, along with promised economic reforms intended to restart growth, are expected to be announced in the upcoming October budget.

Mboweni also committed the state to zero-based budgeting  in its fiscal consolidation effort. This approach to budgeting aims to align government’s spending directly with its revenue, rather than using the previous year as a base.

Moody's, however, appeared unconvinced.

“Given SA’s weak track record of fiscal consolidation in recent years and the weak medium-term economic outlook, debt stabilisation by 2023 will be very difficult to achieve,” it said.

In late March, just as SA entered into lockdown, Moody's downgraded SA to junk status — cutting South Africa's last investment grade credit rating and placing the country on a negative outlook.

Fellow ratings agencies Fitch Ratings and S&P Global followed suitwith both lowering their ratings further into junk territory.