South Africa's 2020 budget review highlights the severe deterioration underway in public finances and the long-term policy challenge of stabilising government debt, ratings agency Fitch said.

Fitch, which like S&P Global has downgraded South Africa's credit standing to sub-investment grade, said fiscal metrics had worsened moderately as indicated in the budget tabled by Finance Minister Tito Mboweni in Parliament on Wednesday, compared with last October's medium-term budget policy statement.

It said budget consolidation measures announced by Mboweni relied heavily on hoped-for moderation in public sector wages which might not materialise, adding further risks to South Africa's deficit and debt trajectories.

As part of efforts to reduce the budget deficit, expected to reach 6.8% of gross domestic product in 2020/21, Mboweni proposed cutting R160-billion from the public wage bill over the next three years. 

He signalled he hoped this and other measures would fend off a downgrade to junk status by Moody's, the last of the three main ratings agencies still maintaining South Africa at investment grade.

Fitch noted that the most recent three-year public sector wage settlement only expired in April 2021, and that the last agreement in 2018 was significantly higher than budgeted. 

"The government has made a formal request to renegotiate this settlement but this would be the first time that an existing wage agreement has been opened," it noted.

"The political scope for making substantial cuts in other areas, should wage savings not materialise, also appears limited, given social pressures for improvements in the delivery of public services."

Fitch noted that persistently low GDP growth, combined with bail-outs of state-owned enterprises, had been the key factors behind the deterioration in public finances over recent years, and said reforms envisaged by the government were unlikely to significantly improve growth prospects in the medium term. 

"Given the deterioration in revenue forecasts, the government now acknowledges that it will not stabilise debt/GDP over the medium term," said the ratings agency, which in December affirmed South Africa's sovereign rating at 'BB+' with a negative outlook.