The Medium Term Budget Speech and the Rating Agencies – Danger in December
The new Minister of Finance didn’t have much time to prepare for the Medium Term Budget Speech (MTBS) but he carried it off well.
The MTBS is a three year outlook for the government budget and was introduced by Trevor Manuel to increase transparency into our budgeting process.
Our Big Challenges
For the last nine years, Treasury has fought hard to keep the budgeting system credible. It is the major reason why South Africa has averted the country sinking into outright junk status and joining the downward path of countries like Venezuela.
Yet there has been slippage – several years ago we never planned that our budget deficit to GDP (Gross Domestic Product or the sum of all the outputs of the economy less the inputs or costs) ratio would rise to over 4% or that the Debt to GDP ratio would exceed 50% (i.e. the net indebtedness of government borrowing to GDP).
In Minister Mboweni’s budget these figures are breached – the budget deficit will rise to 4.2% of GDP in the MTBS and the Debt to GDP ratio will reach over 56%.
The Rating Agencies
Two of the major rating agencies have put the country on junk status. Only Moody’s have kept South Africa on an investment rating. Should Moody’s cut us to junk status (and they will decide in December) we can expect a large capital outflow of at least R150 billion as major financial institutions will be forced to offload South African bonds. This will cause the Rand to depreciate with consequent adverse impacts on inflation, investment and economic growth.
What will Moody’s do in December?
Moody’s have already indicated that they view South Africa’s rising debt as alarming. Like other rating agencies, they also carefully watch how we are managing our State Owned Entities (SOEs) and whether we have a believable plan to put the economy on a growth path.
These are important as the SOEs carry substantial debt, the bulk of which is guaranteed by Government. Eskom for example has R350 billion in debt of which over R200 billion is subject to Government guarantee.
Economic growth is significant as you can only cut costs for so long and the best way to solve economic problems is to show strong economic momentum. At the moment we are growing at 0.7% versus global growth of 3.5%.
In both these areas, the Government has a credible story to tell. The new Minister of State Enterprises, Pravin Gordhan, has replaced non-performing SOE Boards with new experienced leaders and has been putting in governance structures to stifle corruption.
The President’s Plan
President Ramaphosa recognises the need for economic growth and has devised a plan which focuses on reigniting the economy.
The main elements of the President’s growth plan are:
An infrastructure fund (Ramaphosa plans to raise $100 billion over the next five years. Already he has made substantial progress with this and economists estimate that as new investments kick in from 2020 88,000 jobs will be created annually and economic growth will accelerate).
Creating jobs in the economy. The unemployment rate is 27.5% and he has launched the YES (Youth Employment Service) Program. In addition R50 billion of Government expenditure has been reprioritised to focus on this issue.
Finding solutions to problems with health and education – two key areas where without progress, we will not get out of the current economic stalemate in the long term.
Generally, the markets have reacted favourably to these initiatives. The key will be Moody’s response in December when they decide if we will descend to outright junk status. It seems likely that Moody’s will give the country time to see how the Budget progresses and how the President’s economic recovery will do – let’s hope so.
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