Home South African Credit rating agencies adopt ’wait-and-see’ approach to Godongwana’s mini-budget promises

Credit rating agencies adopt ’wait-and-see’ approach to Godongwana’s mini-budget promises

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Finance Minister Enoch Godongwana may have managed to stave off a potential credit ratings downgrade of South Africa’s bonds as he tabled very balanced fiscal metrics in his medium-term budget.

Enoch Godongwana makes his maiden mini-budget speech as the new Minister of Finance. Picture: Phando Jikelo/African News Agency (ANA)

FINANCE minister Enoch Godongwana may have managed to stave off a potential credit ratings downgrade of South Africa’s bonds as he tabled very balanced fiscal metrics in his mini-budget.

Moody’s Investor Services and S&P Global are set to issue their country review on Friday.

A further downgrade of South Africa’s bonds deeper into sub-investment level would mean higher borrowing costs for the government, raising the overall cost of living which is already at record highs.

The markets last week responded positively to Godongwana’s medium-term budget policy statement (MTBPS), which committed to fiscal discipline, debt reduction and managing the budget deficit.

The rand even strengthened below the R15.20-mark to the greenback as South Africa’s credit risk, which is the perceived risk of default, slightly moderated.

The MTBPS showed a tax revenue windfall of R120.3 billion due to the commodity price surge, and revised economic growth forecast upwards to 5.1 percent for 2021.

The high tax revenue has been a blessing for the fiscus, given the fears in 2020 that the government may have to resort to the International Monetary Fund for assistance.

However, debt-servicing costs and the public-sector wage bill will continue to crowd out the government’s spending in the medium-term while the pace of structural reforms needs to gather momentum.

Stanlib’s head of fixed income, Victor Mphaphuli, praised the progress on fiscal consolidation and management of the debt trajectory as “encouraging”.

Mphaphuli said the main risks lay in whether the government could deliver on its promises, setting future gross domestic product growth on a higher path. However, he said he expected the credit ratings agencies to adopt a “wait-and-see” approach to the promises Godongwana made.

“I expect rating agencies to adopt a wait-and-see approach, particularly around the promises that he has made, until maybe into next year,” he said. “That is effectively when we will find out whether ratings agencies are willing to make a positive move on South Africa’s debt.”

South Africa’s foreign- and local-currency ratings were cut two and three levels below investment grade a year ago, with the outlook remaining negative as fiscal metrics deteriorated elevated levels of borrowing to mitigate the impact of the Covid-19 pandemic.

In May, Moody’s skipped a scheduled review of the country’s credit rating after it had warned that it would likely downgrade South Africa further if its debt burden continued to grow.

Fitch has not given any specific dates for South Africa’s review, but on Friday it issued a series of reviews against major local banks, affirming their ratings as junk with a negative outlook.

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