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Within minutes of the Finance Minister, Malusi Gigaba’s Mid Term Budget statement release, the currency market expressed its disappointment (disapproval) therein. Evidencing this is the rand, which has now given up more than 3% against the US Dollar, 3.5% against the Euro and 4% against the British pound.
The budget deficit for South Africa has been revised significantly higher for 2017/18, to 4.3% of GDP (from 3.4% previously). Gross debt for the country is expected to rise to a massive 60.8% by 2021/22 and the costs of repaying this debt are expected to amount of 15% of revenue by the end of the Medium term Expenditure framework (METF). The debt repayment costs would then be the largest item in the budget.
The fragile state of state owned enterprises (SOEs), most significantly South African Airways (SAA) and the South African Post Office (SAPO), continues to weigh on the economy. Treasury is looking to sell around R4bn of Telkom shares to help fund the ailing businesses. The share sale will be to the Public Investment Corporation (PIC) with an option to buy the shares back at a later stage (seemingly very unlikely). Unfortunately whilst recognising the ill state of SOE’s, as well as a likely continuation of ongoing funding being needed for these businesses to operate, there is still little in the way of plans to remedy the issues at hand.
Further ratings downgrades appear imminent. Fiscal consolidation, the health of SOE’s and maintaining the expenditure ceiling are some of the key factors ratings agencies are watching at the moment. If the aforementioned factors were a three point scoring system for the likes of Moody’s and Standard & Poor’s rating agencies, the unfortunate truth is, the scorecard would have a zero reading.