Mid-term budget good enough to keep Moody’s happy

The Mid Term Budget Policy Statement (MTBPS) made credit rating agency Moody’s happy by reaffirming government’s commitment to fiscal consolidation despite the global energy and food price shocks.

Moody’s Investors Service says in its issuer comment Minister of Finance Enoch Godongwana announced better-than-expected revenue outcomes, which translate to improved fiscal deficits and lower-than-expected debt levels in the coming years, which is considered a credit positive.

Budget speech observations

Higher revenue gives Godongwana a boost

Government revised its fiscal deficit to 4.9% of gross domestic product (GDP), from 6.0% of GDP in the 2022 budget statement published in February, driven primarily by higher-than-expected revenue, while the increase in public expenditure remains contained.

Consequently, Moody’s says, government is also projecting narrower fiscal deficits during the fiscal years 2023 and 2024 of 4.1% of GDP (4.8% in 2022 budget) and 3.9% of GDP (4.2% in 2022 budget).

“We expect a slightly slower fiscal consolidation than the government, because we expect higher spending pressures and constrained economic growth prospects of 1%-1.5% over the next few years.

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Debt expected to decline more

If government is able to deliver on its fiscal plan, Moody’s expects the country’s debt to continue declining gradually because South Africa will return to a primary surplus in 2023 for the first time in more than a decade.

Moody’s then also forecasts that the country’s debt will decline to 72% of GDP as early as 2025.

Referring to government’s indication that between one and two-thirds of Eskom’s debt will be transferred to its balance sheet in the fiscal 2023 budget, Moody’s says that the transfer has no immediate implications for the sovereign rating because its consolidated government debt-to-GDP ratio already includes government guarantees to state-owned enterprises.

This explains the difference between its 2021 general government debt figure of 75% of GDP and the national authorities’ figure of 68% of GDP.

Load shedding frequency increased

“Although the debt transfer will support Eskom’s financial sustainability, it will not alone resolve the general maintenance and operational challenges in the energy sector, which will remain a drag on the South African economy.”

Moody’s points out that South Africa’s electricity production, contracted between 2016 and 2021, lagging the performance of its global peers while the frequency of load shedding also increased over the period.

South Africa’s current rating with Moody’s is Ba2 stable, while Eskom is rated Caa1 negative.