Why the 2019 Budget Speech might keep the rating agencies happy

David French, Director of Tax Consulting at Forvis Mazars says that with the 2019 South African general election looming, many expected this year’s Budget Speech to largely be composed of populist messages aimed at voters. However, he points out that the Minister’s Speech, in fact, spoke directly to rating agencies with the goal of addressing some of the most important concerns.

“It is true that the Budget Speech contained some challenges that do not count in South Africa’s favour. The wide budget deficit and the fact that gross domestic product growth has been revised downwards to 1.5% for this year, are both quite bad signs for investors. However, the Minister also focused on two key factors that rating agencies will want to hear.”

The first of these messages, according to French, was about the future of state-owned entities (SOE). “The current situation with Eskom is probably one of South Africa’s biggest red flags at the moment, and many have said that the ongoing threat of load-shedding will be the biggest factor affecting South Africa’s credit rating. On the other hand, this is the first year in anyone’s memory that the Minister of Finance openly questioned South Africa’s need for SOEs, implying that Government is ready to start looking for alternative solutions. It may be pure optimism at this stage, but this seems like a step in the right direction.”

The other concern for South Africa at the moment is the growing debt-to-GDP ratio, which French explains was also addressed. “The debt-to-GDP ratio is set to grow to 60.2% by 2023/2024, and recede slightly to 60.1% the following year. This is not ideal but the fact that it is expected to grow only by 4 percent over the next four years, and then remain there, shows that Treasury aims to stabilise South Africa’s debt. We will have to see if that satisfies the ratings agencies.”

Whether Treasury can deliver on the points that were raised on Wednesday, is, of course, the question, says French. “To some extent, the way that the rand reacted Wednesday (ending 11c higher against the US Dollar than on Tuesday), is one indication that this was an effective Budget Speech. Is the 2019 Budget good enough to keep rating agencies from downgrading South Africa? At this stage, we cannot say for certain but I believe that there is a fair chance that it is,” French concludes.