The risk of South Africa being downgraded to full junk status increased on Wednesday.
Lullu Krugel, chief economist at PwC Strategy, and dr. Economist Christie Viljoen says that although Moody’s Investors Service will find “some good news” in the budget review, most of the figures in the credit rating has weakened.
Moody’s is the last major grader to rate government debt at an investment level. The outlook for the rating was turned into negative in November and Moody’s decided on the rating again on March 27.
Treasury now predicts that government debt will jump to R4 380 billion in 2022. This would raise the debt-to-GDP ratio to a disastrous level of 71.6%, 0.3 percentage points higher than the Treasury expected in the medium-term budget framework in October.
Krugel and Viljoen say although the change has not been bad since October, the outlook is much worse than a year ago. This is already well above the 60% level, which the International Monetary Fund (IMF) has referred to in the past as “uncomfortable”.
Finance Minister Tito Mboweni said in a news conference ahead of his budget speech in response to a question about Moody’s that he hopes graduates look at their fiscal stance and see that Treasury is determined to lower debt levels – even if debt levels weaken in the medium term.
The PwC team believes it is good news that at least it will try to tackle the state’s huge salary bill, as well as the proposed reforms that will fuel the country’s economy. The promise of structural reform has been the “buffer against downgrade” for Moody’s in recent times.
“However, the realities are that expectations of economic growth have been lowered, spending has not been significantly cut, and the budget deficit has bloated.”
Many economists expect a downgrade by Moody’s this year, but there is no consensus whether this will happen in March or November.
“Something has to be done, and very quickly, to avoid a downgrade. It’s high noon at the Last Chance Saloon . ”
Prof. Northwestern University business school economist Raymond Parsons says that considering the budget as a whole, it remains an open question whether enough has been done to avert a downgrade. “It is likely to be scarce in light of the economic and fiscal cross-currents reflected in the budget.”