Moody s keeps tabs ’ on fiscal juggling

Agency scrutinises SA s sense of urgency and exit strategy from Covid -19 support measures ’

As SA grapples with its precarious fiscal position, Moody’s Investors Service says it will be watching how the government plans to roll back monetary and fiscal support measures introduced to shield the economy from the coronavirus crisis.

SA’s “exit strategy” from the stimulus measures — including the timing of any rollback and the level of co-ordination between monetary and fiscal authorities — will be an important question for the ratings agency, Lucie Villa, Moody’s vice-president, said in a webinar on Monday.

Finance minister Tito Mboweni is due to present the medium-term budget policy statement in October.

Alongside this Moody’s is watching for a “credible, clear” fiscal consolidation strategy and a sense of urgency on long debated structural reforms that will help ameliorate what Villa called “probably the largest ever recorded deterioration” in SA’s credit and economic metrics.

Moody ’ s moved SA into subinvestment grade in March, contributing to a market selloff that sent the rand and local bonds to record lows, citing the country ’ s deteriorating fiscal position and weak growth. Things have only become worse, with the Reserve Bank this month saying the economy would shrink more than 8%, implying an even bigger budget deficit than the 15.7% forecast by the Treasury, which was based on GDP dropping by 7.2% in 2020. The government is also under added pressure over its perennially troubled stateowned entities such as SAA.

SA policymakers launched a host of support measures, including a R500bn fiscal stimulus package that included additional grant support for vulnerable households, tax relief measures and a R200bn loan guarantee scheme to support businesses. At the same time, the Reserve Bank slashed interest rates to 50-year lows, provided regulatory relief to banks to support lending and bought government bonds in the secondary market to improve its functioning and to inject liquidity.

In the aftermath of the downgrade, the rand slumped to a record low R19.35/$ in April, while the 10-year bond yield surged to more than 12%. The rand was at R17.1334/$ on Monday, down from a 2020 best level of just under R14/$.

While SA is “highly con

strained ” in removing the support measures because moving too quickly could jeopardise the economic recovery, moving too slowly meant the fiscal deficit would remain large, Villa said.

Moody ’ s has previously expressed scepticism on the ability of the government to deliver on the state’s debt consolidation ambitions, especially a proposed cut in the public sector wage deal, which is opposed by trade unions.

The medium-term budget policy statement is going to be closely watched for more detail on the structural reforms aimed at boosting the economy’s competitiveness.

But aside from the stimulus measures, the timing and coordination of the fiscal consolidation plan in itself is a challenge facing SA authorities.

“Just the idea of consolidating the fiscus is also something that we know can hamper growth,” she told Business Day in a follow-up telephone call.

“The government has targeted certain parts of the budget to support that fiscal consolidation, including the indexation [moderation] of civil servants’ salaries, but we also know [that] is something difficult to put in place, in general, and in a country like SA even more so,” she said.

Villa said that a question for Moody ’ s would be the extent to which this budget provided a sense of urgency on reforms, or whether the government again defers these decisions into the future.

“Of course we know the difficulty to put out a credible fiscal consolidation plan,” she said. It needed to be realistic and this meant recognising the growth and unemployment constraints at the same time as consolidating areas of the budget that will have “a minimal impact on your economic environment”.

Villa did not provide an outright view on government plans to provide R10.5bn for the bankrupt SAA, while noting the budget is constrained and questioning the wisdom of spending taxpayers ’ money on the airline. But national airlines globally “are receiving a lot of taxpayer money at the moment”.

Moody ’ s would focus on how much it receives, the conditions the support comes with and the strategy for the business.