Moody’s Criticizes South African Budget Speech Ahead of Ratings Decision

by Nicholas Megaw
Financial Times

Moody’s has harshly criticised South Africa’s latest budget plans, just weeks before it rules on whether to cut the government’s credit rating to junk status.

South African assets suffered their worst week in more than six months last week, after the government cut its growth forecasts and warned that fiscal deficits will be higher than expected for the next few years.

In an report on Monday, Zuzana Brixiova – Moody’s lead sovereign analyst for South Africa – said the medium-term budget represented a “marked credit-negative departure from earlier fiscal consolidation efforts”.

According to the new forecasts, interest payments will soon make up 15 per cent of government spending, a level which Ms Brixiova said “is crowding out pro-growth expenditures while raising mandatory recurring spending”.

She said the country’s “debt sustainability is at risk” unless the government “presents a credible fiscal consolidation plan in the February 2018 budget”. Such a plan could be difficult to achieve, however, as weaker tax revenues mean the government would need to cut back on spending, an unlikely step given an impending general election.

Moody’s and fellow rating agency S&P are due to update their ratings on South Africa in late November. Both agencies already rate the government on the lowest investment-grade level with a negative outlook, and many investors are expecting at least one downgrade next month.

If both agencies cut the government’s debt into junk, its bonds would no longer be able to be included in Citi’s World Government Bond Index. The index is closely tracked by investment funds and expulsion could cause sharp outflows that would pile further pressure on South African assets.

In the short-term, however, South African markets were fairly calm on Monday morning, with yields on the government’s benchmark 10-year debt down 3 basis points to 9.105 per cent. Yields fall when prices rise.