Moody’s released its take on the MTBPS this morning. Our key take is that the agency may not downgrade South Africa’s sovereign credit rating as early as November. The absence of fiscal consolidation is credit negative but a wait-and-see approach is possible until the Budget Review is tabled in February 2018. The MTBPS exposed the dynamics between weak growth and the rising debt trajectory if urgent measures are not implemented to bolster confidence, cut government spending and address corporate governance and management at SOE’s.  A downgrade from S&P remains a risk but South African LC bonds will remain in Citi’s WGBI if Moody’s decision is pushed out to February 2018.

• The MTBPS signals a credit-negative change in policy direction:
  • The absence of fiscal consolidation owing to an increase in the budget deficit and a reduction in recurrent spending.
  • Continued increase in government guarantees

What has changed

• The budget deficit is envisaged to remain high (at 3.9% of GDP) over the next three years compared with targeted gradual fiscal consolidation previously.
• Public debt/GDP  is expected by to exceed 60% of GDP by F2021 compared with the debt stabilisation objective outlined previously.
• Debt servicing costs consumer 15% of revenues by F20/21. The median of similarly rated sovereign peers is 9.8%.  

Wating for the February 2018 Budget Review?

• Moody’s stated that this is the first MTBPS in the past several years that does not have the objective of fiscal consolidation. “Unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk.”
• The agency stressed that the thrust of the adjustment would need to come from the expenditure side as revenue receipts are expected to be lower.
• It warns that this will be challenging to achieve amid rising spending pressures in the run-up to the 2019 elections.