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Ratings agencies not convinced by Mboweni’s plan

By Siphelele Dludla Nov 1, 2020

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JOHANNESBURG – Ratings agencies have poured chilly water on the federal government’s capability to rein in spending, warning of additional downgrades if the federal government’s funds continued to deteriorate.

Moody’s mentioned that Finance Minister Tito Mboweni’s plan to comprise progress in public sector salaries at 1.8 % was more likely to be met with resistance from the unions.

“The government expects further cuts on the wage bill beyond 2020, but negotiations with social partners will be difficult,” Moody’s mentioned in a word.

On Wednesday, Mboweni dedicated the federal government to rein in spending throughout his Medium-term Budget Policy Statement (MTBPS). Mboweni mentioned the federal government would freeze the general public wage invoice for 3 years as a part of substantial cuts to its non-interest expenditure projections amounting R300 billion to avert a looming debt disaster.

The cuts would quantity to R199bn within the subsequent two years to offset the R40bn enhance in debt service prices.

Mboweni additionally projected an additional deterioration in authorities’s debt to gross home product (GDP) projections and monetary deficits.

He mentioned debt ranges would escalate greater than anticipated within the subsequent 5 years, rising from R3.97 trillion, or 81.8 % of GDP, to R5.5 trillion, or 95.3 % of GDP within the 2025/26 fiscal 12 months as fiscal metrics deteriorate.

Lower actual and nominal progress has added to the strain on considerably stretched public funds because the GDP is forecast to contract by 7.8 % this 12 months.

Mboweni mentioned the federal government was not anticipating a unfavourable response from scores agencies. He mentioned the federal government did not count on any additional credit score downgrades provided that the federal government was doing no matter it may in a troublesome scenario.

However, the scores agencies have been not convinced. Fitch mentioned the freeze of public sector wages would seemingly face robust opposition from labour unions.

The company mentioned the success of the plan would rely crucially on troublesome negotiations with unions.

“Tensions within the governing African National Congress will also hamper policy-making and exceptionally high inequality raises social pressure for additional spending,” Fitch mentioned.

Fitch, which charges South Africa’s debt at BB with a unfavourable outlook, added: “Despite the Economic Reconstruction and Recovery Plan released by the president, Cyril Ramaphosa, in mid-October, growth will remain weak.”

Treasury lower its progress forecasts for 2020 to a 7.8 % contraction, whereas the funds deficit was seen widening to fifteen.7 % of GDP. Investec’s chief economist Annbel Bishop mentioned the MTBPS was not a full austerity funds, however contained a notable shift in expenditure from consumption to infrastructure funding.

Bishop mentioned the check would nevertheless be on the implementation.

She mentioned the ranking agencies have been more likely to downgrade South Africa on the again of this funds.

“While these expenditure cuts are largely in line with the expectations from the markets, it does not nullify the massive rise in South Africa’s future debt quantum announced in June,” mentioned Bishop.

Mboweni mentioned the scores agencies must determine on their views based mostly on the true image of the nation’s steadiness sheet.

He mentioned his MTBPS tried to stabilise debt to keep away from important expenditure reductions throughout authorities, together with attainable pay cuts to management-level positions throughout nationwide, provincial and municipal governments, state-owned entities and all different senior public representatives. Bishop mentioned the MTBPS, nevertheless, confirmed that fiscal consolidation remained elusive with South Africa shifting ever nearer to an unsustainable debt lure.

“The rating agencies may avoid downgrading SA by two notches at their country reviews on 20th November this year, but not enough has been done overall to comfortably avoid a one notch downgrade, especially as both Moody’s and Fitch already have SA on a negative outlook,” Bishop mentioned.

Anchor Capital’s Nolan Wapenaar mentioned the allocation of R10.5bn bailout to SAA was a worrying issue concerning the nation’s fiscal consolidation.

“In our view, this sets an uncomfortable precedent with regards to the government’s handling of problematic SOEs (state-owned enterprises),” Wapenaar mentioned. “Interestingly, the Land Bank received a further R7 billion bailout, which is sizeable when considered against the recent R3 billion bailout of the same entity.”

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