Rating agency Moody’s says the successful implementation of structural reforms along with the reduction in government debt could lead to an upgrade in the country’s sovereign rating.

In its latest report, Moody’s has warned that South Africa could lose its current investment grade if it were to become clear that debt by State-owned enterprises will not stabilise.

Economist Jeff Schultz says Moody’s will rely on next week’s Medium-Term budget statement to address some of these concerns.

“We need to show that the budget deficit … while deteriorating in the near term, the Treasury must show that these will narrow in the medium term. We need to ensure that debt to GDP ratio is below 60%. More generally, the rating agency want to see more evidence of indications of policy and investment are likely to boost growth in the medium term,” says Schultz.

Recession, falling revenue hurt public finances

Falling revenues and a recession mean South Africa will struggle to finance public services, the National Treasury said on Tuesday, as ratings agency Moody’s warned of the risks of rising government debt.

Africa’s most industrialised economy tipped unexpectedly into recession in the second quarter, and the appointment of anew finance minister added to currency and financial market turmoil.

President Cyril Ramaphosa last week made former central bank governor Tito Mboweni his fourth finance minister in two years,replacing Nhlanhla Nene who quit after admitting to meetings with the family at the centre of corruption allegations.

Mboweni will deliver the medium-term budget policy statement (MTBPS) next week, which will be closely watched for details of Ramaphosa’s stimulus plan to pull the economy out of recession and avoid further ratings downgrades.

“The contraction of our public finances is placing tremendous stress on us and our ability to finance public services and this threatens the affordability of planned expenditure,” Treasury Director-General Dondo Mogajane told a parliamentary committee.

 

Moody’s said it expected Mboweni to keep the government’s broad policies intact in the budget speech. But the agency said South Africa faced constraints,including high government debt and contingent liabilities from state-owned enterprises which would “limit the capacity of the government to absorb potential shocks or use fiscal stimuli”.

The agency did not publish a review of South Africa on Friday as was widely expected, but it published a credit opinion report on Tuesday.

Mogajane said he expected Moody’s to release its ratings review after the MTBPS. The ratings agency said in September it did not expect to downgrade the country to junk status.

Ramaphosa last month announced a multi-billion-dollar stimulus programme, earmarking funds for job creation and infrastructure development.

Moody’s said the “very small” stimulus would have little impact. “The MTBPS will be calm on the surface but hide some furious’kicking’ below the surface to hold the line against revenue underperformance and the political pressures for a ‘real’stimulus,” said analyst Peter Attard Montalto of Intellidex. -Additional reporting by Reuters  

 

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