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March 17, 2020

Over the past several years South Africa’s debt position has worsened considerably to the point where of the major ratings agencies only Moody’s has not downgraded us to junk status. They have made it clear that they are seriously considering such a move and will probably make the decision based on how they view Minister Mboweni’s budget.

One key to this is how the Minister approached restoring fiscal discipline to the economy. He has already stated that R150 billion in savings needs to be achieved in the next three years. 

By cutting the wage bill of public servants by R160 billion (nearly R38 billion in the 2020 Budget) over the next three years, Minister Mboweni has achieved the required savings. But will the unions accede to this? Almost certainly not without a bloody battle and Mr Mboweni has acknowledged this is going to be a very challenging time. The key negotiations will happen mid-year, so Moody’s may wait for the outcome of these talks. 

The second key to avoid a Moody’s downgrade is sustained economic growth – yet we had an estimated 0.3% growth in 2019 and 2020 is forecast at 0.9% (2021 at 1.3% and 2022 at 1.6%). Load shedding will continue for at least two more years and this considerably dims any realistic chance of there being any breakout of economic growth.

Even with the wage cuts announced national debt will continue to climb and by 2022/23 interest payments on debt will be approaching R300 billion or 18% of the budget (almost double what it was in 2014). Debt to GDP will be over 71% versus 61% now. This is exacerbated by the fact that an additional R112 billion has been allocated to SOEs of which R60 billion is for Eskom.

It is encouraging that government is now making concerted efforts to remove the impediments to economic growth but the problems such as a bloated public service, Eskom and structural problems like inadequate infrastructure, corruption and inordinate red tape have been around for years. Time doesn’t wait and as the song says “you’re out of time”. 

Moody’s have already expressed doubt about how achievable the R261 billion cuts in public salaries are. Moody’s vice president Lucie Villa: “The authorities have yet to negotiate any moderation in wages with the country’s unions, which will likely be challenging given South Africa’s socioeconomic realities and would represent a significant departure from the outcome of previous negotiations.”

Tito Mboweni was brave to recognise that piling on tax increases is counter-productive and that urgent reforms need to be made but the general consensus seems to be that it is difficult to foresee any other outcome than a Moody’s downgrade.

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