The Plan to Stabilise the Government's Finances
It must be noted there is a lot that's good in Budget 2019, including the determined effort to boost capital expenditure relative to consumption expenditure (by cutting the public sector wage bill and accelerating public sector infrastructure investment), the firm stance on the need to improve the operational and financial performance of state owned companies, recognition of the need to strengthen the delivery capacity of the state and the renewed focus on the functionality of municipalities.
Indeed, Minister Mboweni indicated the time is approaching when hard decisions need to be taken, including whether or not the central government should issue guarantees for the operational expenditure of SOCs (in aggregate SOCs are increasingly borrowing to fund operational expenditure and interest payments), as well as consideration of equity partners where necessary.
As regards SANRAL specifically, the Minister emphasised the importance of applying the user pays principle.
Further, the willingness to engage the private sector in infrastructure investment is welcome. The infrastructure fund aims to accelerate R526 billion on-budget projects by involving the private sector and development finance institutions. The former is expected to participate in the design, build and operation of "key" infrastructure assets.
Overall, the Treasury's intent is to stabilise the debt ratio and return South Africa's government finances to a sustainable path.
But, that said, the track record of recent years is not good and the weakness of the public sector's balance sheet raises questions over South Africa's fiscal consolidation effort. Net government loan debt plus its exposure to contingent liabilities (in the form of government guarantees alone) amounts to 55% of GDP and is projected to increase to more than 60% of GDP over the next three years.
It is not known whether Moody's rating agency will give the government the benefit of the doubt as regards the state's difficult reform strategy. But, given the above, it is clear that the risk of a downgrade of South Africa's government debt rating to sub-investment grade by Moody's has increased, given the absence of fiscal consolidation and an
ever increasing debt ratio – although the first step would likely be a change in the outlook from stable to negative, rather than an immediate downgrade.