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SA’s Medium-Term Budget hits a high fiscal note, but will credit ratings agencies hear the overtures?

Xolisa Phillip
By Xolisa Phillip
27 Oct 2022
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The Medium-Term Budget Policy Statement has made the correct overtures to relevant observers. It also cements South Africa’s fiscal framework as credible. However, it does not make up for the structural weaknesses in the domestic economy. The growth outlook remains unsupportive of job creation – a key metric for sovereign credit ratings agencies.

With many competing demands and expectations to consider, South Africa’s latest Medium-Term Budget Policy Statement (MTBPS) reflects the unusual set of circumstances besetting the domestic and global economic environment.

Against the backdrop of a continent riven by the spectre of debt defaults and inflationary pressures that have brought thousands of people out onto the streets in protest, demanding relief from hunger, the MTBPS shows a resilient fiscal framework.

Arguably, the recently tabled MTBPS also makes for a credible case against the mischaracterisation of the country as a borderline failed state. A state nearing collapse cannot organise its financial affairs or present a cogent outline of its fiscal trajectory.

That is all notwithstanding the structural challenges in the domestic economic context and the ever-present threat of spillovers from global developments.

The MTBPS can only do so much – the rest hinges on a whole-government national approach to meet the socioeconomic challenges of the time. That includes the provincial and municipal tiers of government.

The fiscal framework provides the foundation. However, it cannot account for failings and shortcomings elsewhere in the state chain of command.

A flaw in the South African system is that the fiscal framework often serves as a disciplining mechanism for excesses in the wider ecosystem of government – fanciful departmental policy proposals, state-owned companies in distress and dysfunctional councils.  

That de facto stopgap function not only raises the weight of expectations on the fiscus to take on responsibilities beyond the scope of its mandate, but also tends to somewhat shield sluggish elements within government from accountability.  



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Accelerated policy reforms in key areas are yielding moderate results, albeit not at the pace and scale required to uplift the domestic growth outlook to sufficient levels that would make a dent on historically high unemployment.

When Moody’s Investors Service and S&P Global Ratings make their assessments of the MTBPS in coming weeks, one can make an educated guess that South Africa’s sovereign credit ratings will not be revised upwards. However, the favourable outlooks could be affirmed.

Despite a solid commitment to fiscal consolidation, economic growth remains elusive. On the latter score, the country is regressing to the low growth levels experienced in the past decade.

Some economists would go even further to state that South Africa is in a semi-permanent technical recession. Certainly, the growth expectations of less than 2% support such a point of view, given that the economy has been wide open for some time now.         

Moody’s Aurélien Mali notes South Africa’s reaffirmation of fiscal consolidation in the MTBPS.

But the sovereign credit ratings agency still expects the country’s economy to grow at rates of 1%-1.5% over the next few years, partly because of infrastructure challenges, according to Mali, who is a vice-president senior credit officer at Moody’s.

In its May review, S&P said it would consider raising South Africa’s credit ratings if the country’s growth outlook improved and “supportive external sector dynamics” continued.

At present, South Africa meets neither upside scenario. Instead, the downside risks prevail – growth remains below par and demand for commodities is waning because of a slowdown in China, where the coronavirus is making a resurgence.

Unlike the February Budget in which above-forecast revenue collection came from commodities exports, supported by steady demand from China, the better-than-expected takings projected in the MTBPS are attributable to corporate income tax.   

In its Africa Pulse publication, the World Bank underscores the region’s dependence on demand from the rest of the world for its exports as a structural weakness. South Africa is no exception in this regard.

These uncertain and unprecedented times highlight the importance of a functional domestic environment, which could be positioned as a buffer from the impending external shocks.

For that to happen, all tiers of government – national, provincial and municipal – have to sing from the same hymnbook of accountability. BM/DM  

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