International ratings agency Moody’s has warned that country could face further downgrades as Finance Minister Malusi Gigaba’s medium-term budget policy statement (MTBPS) last week indicated a move away from the fiscal consolidation path that the country had undertaken in the past few years. 

Moody’s lead sovereign analyst for Africa Zuzana Brixiova yesterday said that the absence measures to contain the fiscal deficit and reducing mandatory recurrent spending showed that the country had abandoned fiscal consolidation to damage an already feeble business confidence and growth.

She said the MTBPS was the first fiscal policy document in the past several years that lacked fiscal consolidation. 

“In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk,” Brixiova said.Moody’s credit assessment is expected to next month. Gigaba last week revised the country’s economic growth forecast to 0.7 percent from 1.3 announced in February with a shortfall of 4.3 percent of GDP in fiscal 2017/18 financial year – the highest level since the 2009 financial crisis.

The reviews fell line with the International Monetary Fund (IMF) and World Bank predictions. Investec yesterday said the Moody’s warning was the first from the rating agencies. 
Investec said: “The market will still be bracing for the signal from the ratings agencies that the WGBI outflows will be triggered and are on tenterhooks given the fiscal backdrop, the political noise, the upcoming elective conference.” 

Moody’s downgraded South Africa’s sovereign credit rating in June,  listing ‘reduced growth prospects’ as one of the three key drivers of the review. However SA Reserve Bank deputy governor Daniel Mminele said the economic difficulties were not an indictment on the country’s monetary-policy framework.

“Rather, they illustrate that even a well-calibrated monetary policy cannot, on its own, address the economy’s structural challenges. Of course, monetary policy is always perfectible; its framework can evolve as underlying economic structures change,” Mminele said.

Brixiova said that government would struggle to contain spending amid rising spending pressures in the run-up to 2019 elections. 

“Fiscal risks stemming from the relatively rapid debt increase are exacerbated by a continued increase in government guarantees to state-owned enterprises, where almost half is concentrated in Eskom, which generates 95 percent of South Africa’s electricity,” Brixiova said.

“The lack of fiscal prudence indicated by the budget will undermine growth in an economy in a recession since first-quarter 2017 with weak economic activity, according to recent high-frequency indicators.”

– BUSINESS REPORT