The good and bad about the budget speech that Moody’s will watch

Moody’s Investors Service, the only major rating agency that has not downgraded South Africa to sub-investment grade (known as junk), is expected to issue a review of the country’s credit rating on November 1.

SA is on a knife edge from losing its last remaining investment grade rating from Moody’s, which has SA’s credit rating at Baa3, the lowest investment-grade level.

Already Moody’s has raised concerns about the country’s low economic growth, lack of structural reforms and ongoing support to debt-laden state-owned entities (SOEs) without cutting government spending and stabilising public finances.

Moody’s is expected to hold pat before pulling the junk downgrade trigger by first revising the outlook on SA from stable to negative. But this would leave SA vulnerable to a downgrade to junk from Moody’s, which would see it join its peers S&P Global Ratings and Fitch Ratings.

The 2019 Medium-Budget Policy Statement will likely spook Moody’s, but it will find comfort in the National Treasury’s admission that the country’s finances are in a precarious position.

The bad

• South Africa’s debt-to-GDP remains the highest among its peer countries. The ongoing support to debt-laden SOEs, mainly Eskom, is blowing the country’s debt profile to higher levels. Government has made provisional support to Eskom of R49 billion to be available in 2019/20, R56 billion in 2020/21 and R33 billion in 2021/22. With the financial support to Eskom, the country’s debt-to-GDP is expected to grow from the 2019 budget (presented in February) from 56.2% in 2019/2020 to 60.8%, 57.8% vs 64.9% in 2020/2021, and 58.9% vs 68.5% in 2021/2022.
• In a worst-case scenario, Moody’s expects the debt-to-GDP ratio to rise to 70% in the next two to three years if the government continues to support SOEs without cutting spending and stabilising public finances.
• Despite promises from the government that there will be further details on the restructuring of Eskom’s debt during the 2019 Medium-Budget Policy Statement, there was no mention of this. Eskom is in a dire financial position, with insufficient revenue to service its R460 billion debt load and tariffs that do not allow it to recover all costs. Beyond the financial support to Eskom, the statement noted that the government is forging ahead with its plan to separate Eskom into three distinct entities (generation, transmission and distribution).
• It will be left to Eskom management to fix the power utility and its operations, said Dondo Mogajane, the director general of the National Treasury. “Eskom is too big to fail and we will stand behind it,” he said.
• National Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to bring discipline to Eskom’s finances, and to step up the timeline for restructuring.
• Gross tax revenue is projected to fall short of the 2019 budget estimates by R52.5 billion in 2019/20 and R84 billion in 2020/21, reflecting the weaker economic environment and a decline in tax morality that is still haunted by the state capture years. The revised gross tax revenue for 2019/2020 is R1.369 trillion compared with the R1.422 trillion announced in the February budget
• The combination of lower revenue and increased spending has widened the budget deficit to an average of 6.2% over the next three years.

The good

• Finance Minister Tito Mboweni has talked tough on government expenditure and wastage across all arms of the state. Guidelines will be introduced that apply to members of the cabinet and members of provincial executives, including salary freezes at current levels; the cost of official cars will be capped at R700 000 VAT inclusive; all domestic travel will be on economy class tickets; and there will no longer be payment for subsistence and travel for both domestically and internationally.
• Mboweni said the National Treasury will play “hardball” with tax-guzzling SOEs. Further bailouts that will be given to Eskom will be a loan, which would compel the power utility to start paying money owed back. “This will enable us to differentiate between an equity injection by the government and a loan extended with a very clear directive that the loan would be repaid.”
• Mboweni said a dedicated liquidity office for all SOEs will be set up in the National Treasury for the purpose of assisting SOEs if they want to liquidate assets.

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