MOODY’s Investors Service said on Wednesday that Finance Minister Pravin Gordhan’s planned tax increases in his 2016 budget speech were well targeted, given the weak economic backdrop.
The New York-based rating agency was, however, concerned that the specific revenue measures that would accomplish the smaller deficits predicted for 2017-18 and 2018-19 had not yet been identified.
Moody’s also said the Treasury’s revised growth forecasts of 0.9% and 1.7% were still slightly more optimistic than its own predictions of 0.5% for 2016 and 1.5% for 2017.
The measures Mr Gordhan announced in his budget speech included a reduction in the expenditure ceiling of R25bn, shrinking the budget deficit to 3.2% in the current year, stabilising debt at 46.2% and curbing the public wage bill, which increased far more than inflation last year.
The tax increases he announced were largely aimed at wealthy individuals through increases in capital gains tax and transfer duties on the sale of properties above R10m, while low- and middle-income earners received some good news in the form of zero increases in the personal income tax rate.
Tax brackets for these earners were also adjusted upwards to compensate for the effect of inflation.
“In our opinion, the budget aims at delivering faster fiscal consolidation in part by cutting the large civil servant wage bill while preserving growth-supporting capital spending,” said Moody’s senior vice-president Kristin Lindow.
Moody’s’ comments come as SA tries to allay the fears of jittery investors and ward off a possible downgrade to junk status.
The rand started weakening 20 minutes into Mr Gordhan’s speech, leading commentators to say investors were unhappy with the budget. However, it emerged that Moody’s downgrade of Brazil to junk status was the main reason for the rand rout. The unit lost more than 2.5% of its value against the dollar to R15.62, from R15.23 before Mr Gordhan delivered his budget speech.
The currency consolidated at about R16.20 to the dollar in overnight trade in New York.
The reasons for Brazil’s downgrade seemed frighteningly similar to the situation in SA.
Moody’s said the downgrade of Brazil’s issuer and bond ratings to Ba2 and change of outlook to negative was driven by:
• The prospect of further deterioration in Brazil’s debt metrics in a low growth environment, with the government’s debt likely to exceed 80% of gross domestic product (GDP) within three years; and