Moody’s not happy with lack of implementation detail in mini budget

It seems South Africans are not the only ones who felt we have heard all this before when they listened to the medium-term budget policy statement (MTBPS).

Moody’s Investors Service said on Friday this year’s MTBPS, like last year, 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,” said Lucie Villa, senior credit officer at Moody’s.

She said the MTBPS provided little additional detail on the implementation of structural reforms that would boost sustainable economic activity.

Moody’s does not think South Africa will be able to cut its debt, even in the five-year schedule it has opted for in the MTBPS, saying the Treasury is too optimistic. There is much emphasis on structural reform and fiscal problems, but not enough is being done.

“Therefore Moody’s expects the economy will remain depressed and  fiscal consolidation slow while government debt will continue to increase over the next few years,” Villa said.

Moody’s also said that the South African Reserve Bank’s accommodative monetary policy provides little support for the government’s consolidation efforts.

“While interventions helped to temper upward pressure on long-term borrowing costs, yields on 10-year government bonds still increased to 10.4% at the end of September, up from an average of 10.1% in the first nine months of 2020 and 9.1% in 2019.”

Based on higher than projected interest and primary spending, Moody’s forecasts deficits 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 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.”

Moody’s will soon decide on the country’s credit rating, which is already below investor grade.

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