The South African rand gained on Wednesday after Finance Minister Tito Mboweni said in a budget speech that the government would cut the public sector wage bill to contain a rising budget deficit.
Analysts have long cited rising public sector wages as a big threat to the country’s stretched public finances. The rand traded at 15.1450 to the dollar, around 0.5% stronger on the day. But despite Mboweni’s comments on wages, some economists expect Moody’s to strip South Africa of its last investment-grade credit rating at a review scheduled for March.
“The weakening fiscal position and rising debt burden have further increased the risk of another downgrade from Moody’s,” said John Ashbourne at Capital Economics. The situation is clearly even worse than it was in November, when Moody’s adopted a negative outlook.” Domestic stocks closed higher, with the Johannesburg Stock Exchange’s Top-40 Index ending up 0.4% at 49,500 points and the All-Share Index rising 0.4% to 55,047 points. Consumer-focused companies fared particularly well because Mboweni’s budget speech contained no major tax increases, contrary to the predictions of many analysts. Retailer Shoprite rose almost 10%, followed by lenders Standard Bank and Absa, up 7.94% and 7.41% respectively, and insurer Discovery, which rose 7.2%.
South Africa said it will cut its public sector wage bill to contain a rising budget deficit, which is expected to hit an 18-year high next fiscal year because of weak economic growth and bailouts to state firms, the Treasury said. South Africa has struggled to emerge from a slump in the two years since President Cyril Ramaphosa became head of state and promised sweeping economic reforms.
Africa’s most industrialised economy is on the cusp of losing its last investment grade rating from Moody’s. Deciding against tax increases, the Treasury said it planned to reduce non-interest expenditure over the next three years, including a proposed 160.2 billion rand ($10.5 billion) cut in public sector wages. The rand strengthened on the pledge to cut public sector wages, something financial analysts have long called for given severe fiscal constraints.
“Organised labour understands where we are. They have made constructive proposals on a range of issues,” Finance Minister Tito Mboweni said in a budget speech, adding that the government would negotiate with unions on how the wage bill reduction could be achieved. Unions have already threatened protests after they got wind of government plans to renege on the terms of the 2018 public sector wage deal on Tuesday. Treasury said that it now sees the budget deficit reaching 6.8% of gross domestic product (GDP) in the 2020/21 fiscal year, which begins in April, compared with a previous estimate of 6.5%. The projected deficit would be the highest since the Treasury started producing the consolidated budget in 2002/03. The Treasury warned debt was not expected to stabilise over the next three years, with gross debt peaking at 71.6% of GDP in 2022/23, while debt servicing costs were seen rising sharply. It cut the 2020 growth forecast to 0.9% from 1.2%.
“The risk to South Africa’s remaining investment-grade credit ratings has become more pronounced,” the Treasury said. Moody’s is the last of the top three agencies to rate the country’s debt at investment level, and it is expected to review the rating in March.
