Moody's Investors Service is looking for signs of a credible medium-term vision for South Africa and said it's "a bit early" to judge the government's policy and structural reforms after changing its outlook on the country's credit ratings to negative almost three months ago.

"It is relatively fresh, our negative outlook," Lucie Villa, Moody's vice president and lead sovereign analyst for South Africa, said in an interview on the sidelines of a conference in London on Tuesday. Economic growth data is "not pointing to a positive or a particularly negative direction. There is nothing really to flag for the time being."

The ratings company cut the outlook for South Africa's Baa3 foreign- and local-currency assessments to negative on November 1. That brought South Africa to the brink of a full-house of junk credit ratings, after Finance Minister Tito Mboweni presented a rapidly deteriorating outlook in his medium-term budget policy statement. Gross government debt will surge to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken.

Moody's will look to the February 26 budget review for details on how the government will contain spending and bolster revenue, Villa said. While Mboweni is redoubling efforts to cut the state's payroll costs, which make up 35.4% of national spending, the current three-year agreement may be difficult to change, she said.

"The big question for me is on the tax revenue side, because there has been more than a year that they have been trying to improve tax compliance," she said. "I believe there is potential there."

VAT Hike

Economists including Absa Bank's Peter Worthington and Miyelani Maluleke expect the value-added tax rate to be hiked to 16% from 15% in the budget, adding R35bn to the fiscus in 2020-21. The government increased VAT by a percentage point in 2018-2019.

While the government is forging ahead with plans to split loss-making power utility Eskom into three units under the guidance of new CEO Andre de Ruyter, Moody's says its rating signals the company's financial position is deteriorating, raising the need for the government to step in again.

"We believe that the government is going to be the last resort capital provider and the taxpayer will be the one still paying," she said.

While some analysts expect a downgrade to junk on March 27, when Moody's is next scheduled to assess South Africa, Villa said the date is tentative and the company is not obliged to stick to it.

"The outlook is negative, so what we are flagging is not a necessarily immediate downgrade," she said.

A downgrade will see South Africa without any investment-grade ranking for the first time in 25 years. That would cause it to fall out of the FTSE World Government Bond Index, which could prompt a selloff and outflows of as much as $15 billion, according to Bank of New York Mellon Corp.