South African rand dives as Moody’s warns on fiscal deficit, what you need to know…

PUBLISHED: Wed, 15 Aug 2018 14:16:31 GMT

London, 15 August 2018 — The pace of South Africa’s fiscal consolidation will be slower than government forecasts as weaker than expected economic growth and a rising public sector wage bill act as fiscal headwinds, Moody’s Investors Service said a report today. Despite the slower pace of fiscal consolidation, medium-term deficit targets remain within reach and, if met, will support a stabilization of debt levels and reinforce Moody’s assessment of the sovereign’s fiscal and institutional strengths.

The report, “Government of South Africa: Fiscal slippages likely this year, but medium-term targets remain within reach”, is now available on Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“We expect a slower pace fiscal consolidation than the Government of South Africa is forecasting,” said Lucie Villa, a Moody’s Vice President — Senior Credit Officer and co-author of the report. “Growth this year is expected to be lower than the government’s own estimates, weighing on tax revenues, while the public sector wage agreement in June also brings extra, unbudgeted costs.”

Moody’s expects a fiscal deficit of around 4.0% of GDP in 2018-19, implying a 0.4 percentage point of GDP shortfall from government targets. However, Moody’s expects the government to hit its 3.5% fiscal deficit target by 2020-21, with debt likely to stabilize at around 56% of GDP.

Moody’s expects that near-term fiscal adjustments will be made on the spending side based on the government’s record of operating within spending ceilings and undershooting revenue targets.

Improved tax collection led by the South African Revenue Service will allow revenue to take more prominence in the longer term fiscal consolidation path.

Rising interest costs in the context of investors taking a more risk averse stance towards emerging markets are a main risk to Moody’s fiscal forecasts, together with potential support to state-owned-enterprises.

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