To date only our Rand denominated debt (about 10% of our total debt) has been classified as junk.
On the 25th of October, the new Minister of Finance will present the Medium Term Budget Framework (MTBF). Ratings agencies will closely watch this and if the Minister does not satisfy these agencies, the country will probably be downgraded to full junk status.
Our local currency debt was downgraded following the removal of Pravin Gordhan and his deputy from Treasury. Gordhan was respected by the rating agencies and he had convinced business leaders to help him lobby these agencies and other offshore financial institutions. This had gone a long way in keeping the country from being downgraded.
The general consensus seems to be that the new Minister of Finance, Malusi Gigaba, has yet to gain the confidence of business and consequently of ratings agencies.
The problem we face
One of then Finance Minister Gordhan’s key strengths was that he expressed total opposition to corruption and “state capture”. Business leaders have indicated that they are yet to be convinced that Minister Gigaba is as firm on corruption.
In addition, State Owned Companies (SOCs) have sunk further into debt and some like SAA need to be recapitalised (up to R10 billion will be required). Unless strong governance is introduced into these entities, they will continue to be a drag on South Africa’s finances (Government guarantees SOCs’ debt).
Tax revenue has also dropped and potentially will fall R50 billion short of the target set in the February Budget speech.
How will Minister Gigaba fill a R60 billion hole?
Realistically, there are only two options:
The day of reckoning
The MTBF looks at government revenue and expenditure over the next three years. This is a comprehensive document of government strategies and assumptions. It sets out in detail where revenue and expenditure will be raised and spent. In effect, the Minister will have to demonstrate to the ratings agencies that South Africa is still committed to a prudent fiscal policy. If the MTBF is not considered credible, we can almost certainly expect swift downgrades to junk status which will leave us all poorer.