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Cape Town – The risk of South Africa plunging into the non-investment grade of "junk" will only materialise at the end of 2016, a Standard Bank economist said.
A major concern regarding Finance Minister Nhlanhla Nene’s mini budget speech (MTBPS) on Wednesday was whether he would instill the rating agencies with confidence that South Africa is on track to grow its economy while containing its debt.
Nene lowered the country’s economic growth expectations, cut further spending in government, reduced cash reserves and increased the ratio of debt to gross domestic product (GDP).
Cuts in spending and the depletion of reserves were attributed to the public wage bill, which will cost South Africa R64bn, something Nene really wanted to avoid in his February budget.
With net debt to GDP over the next three years now R47bn higher, net debt stabalisation has been shifted out by two years to the 2019/20 financial year, and stabilises at a higher ratio to GDP: 45.7% versus 43.7%.
“This is negative from a ratings perspective as the plateauing of debt to GDP was a key factor in Moody’s argument to maintain SA’s investment grade rating,” said Kim Silberman, an economist at Standard Bank.
“The stark reality provided by the MTBPS raises the risk of SA falling into non-investment grade, although we still think this risk will only materialise more meaningfully towards the end of 2016.
“In the February budget we noted that structural constraints to growth had come home to roost, forcing Treasury to take decisions that would have a 'stagflationary' effect on the economy, like raising fuel and electricity levies and personal income taxes, which raise inflation and dampen growth,” said Silberman.
“We suggested that, despite this rather drastic action, it would be difficult for SA to stick to its fiscal consolidation path.
“This unfortunately has been the case, such that fiscal consolidation mapped out in the MTBPS is far slower than in February,” said Silberman. “The deficit widens to 3.3% and 3.2% in 2016/17 and 2017/18 versus 2.6% and 2.5% of GDP in February respectively.
“Fiscal flexibility is now severely more limited and any further disappointments to GDP growth (which we think is likely) will see the deterioration in fiscal metrics accelerate, unassisted by historical buffers,” said Silberman.
“Further selling of non-core assets may be in the pipeline, which may be why these expenditure items have now been excluded from the new definition of the expenditure ceiling.
“The mention of nuclear in the MTBPS also indicates the extent to which Treasury is losing ground to more political agendas,” said Silberman.
