Moody’s slams Gigaba’s mini budget as ‘marked credit-negative departure’

Cape Town – Rating agency Moody’s has criticised Finance Minister Malusi Gigaba’s medium-term budget policy statement (MTBPS), or mini budget, as signaling “a marked credit-negative departure from earlier fiscal consolidation efforts”.

Moody’s vice president Zuzana Brixiova, a senior analyst and lead sovereign analyst for South Africa, gave the assessment in a research report on South Africa's mini budget on Monday.

Brixiova warned that South Africa's debt sustainability is at risk because revenue collection is under performing and expenditure will be hard to reduce in the run-up to the 2019 general elections.

The rand did not immediately react to the report, and was trading 0.08% higher at R14.09 to the dollar at 12:32 on Monday.

S&P downgraded South Africa's foreign currency to junk status in April, following President Jacob Zuma's Cabinet reshuffle that saw the removal of Pravin Gordhan and Mcebisi Jonas as minister and deputy minister of finance respectively. S&P kept the country's local currency rating one notch above junk status.

Moody's, which has both South Africa's local and foreign rating one notch above junks, is due to give a ratings update at the end of November along with S&P.

Fitch, which already downgraded South Africa's foreign and local currency to junk status, said last week that the dire economic picture painted "suggests that the change in direction of policy making away from a focus on fiscal consolidation that we anticipated as a consequence of March's Cabinet reshuffle is under way and occurring faster than we had expected".

READ: Fitch has little faith in SA post mini budget

Moody's: Setback to already feeble business confidence and growth

Brixiova said the lack of fiscal consolidation in the budget is a setback to "already feeble" business confidence and growth.

"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," said Brixiova.

"The current MTBPS is the first fiscal policy document (i.e., budget or mini-budget) in the past several years that does not have the objective of fiscal consolidation," said Brixiova.

"In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk.

"However, with lower levels of revenue than formerly projected, the thrust of the adjustment would need to come from the expenditure side, which will be challenging to achieve amid rising spending pressures in the run up to 2019 elections."

Full statement:

South Africa’s Medium-Term Budget Signals Credit-Negative Change in Policy Direction

On 25 October, South Africa’s (Baa3 negative) Finance Minister Malusi Gigaba presented the country’s medium-term budget, which signals a marked credit-negative departure from earlier fiscal consolidation efforts.

The medium-term budget policy statement (MTBPS) revealed sizeable slippage in fiscal revenue (estimated by the National Treasury at 1.1% of GDP) in fiscal 2017, which ends 31 March 2018, relative to the February budget. The revenue shortfall is a key driver behind the National Treasury’s projections for the headline fiscal deficit of 4.3% of GDP in fiscal 2017, the highest level since 2009 and a substantial increase from 3.4% in the budget presented in February 2017.

Significantly, the MTBPS envisages budget deficits remaining at 3.9% of GDP over the next three fiscal years, in contrast with targeted gradual fiscal consolidation tabled in the February budget. As a result, the National Treasury now expects accelerated accumulation of public debt, and expects public debt to GDP to exceed 60% of GDP by fiscal 2021, a notable departure from the debt stabilization objective outlined in the February budget.


Concurrent with the debt burden increasing almost 7% annually between fiscal 2016 and fiscal 2020, the cost of borrowing has risen. According to Treasury projections, the interest burden will be 15% of revenue by 2020-21, which exceeds the 9.8% median of similarly rated sovereign peers. In our view, at this level, the cost of debt servicing is crowding out pro-growth expenditures while raising mandatory recurrent spending.

The absence of fiscal consolidation both in terms of containing the fiscal deficits and reducing mandatory recurrent spending is credit negative, undermining debt sustainability and eliminating room for deploying fiscal stimulus in the event of a negative economic shock. 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% of South Africa’s electricity.

Moreover, the lack of fiscal consolidation in the budget is also a setback to already feeble business confidence and growth. 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.

The current MTBPS is the first fiscal policy document (i.e., budget or mini-budget) in the past several years that does not have the objective of fiscal consolidation.

In our view, unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk.

However, with lower levels of revenue than formerly projected, the thrust of the adjustment would need to come from the expenditure side, which will be challenging to achieve amid rising spending pressures in the run up to 2019 elections.