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Johannesburg - South Africa took a step closer to another credit-rating downgrade as a slowing economy forced Finance Minister Nhlanhla Nene to boost debt at the same time that mounting spending pressures fuelled protests against the government.
Nene, 56, struggled to provide the level of confidence investors were looking for in a mid-term budget on Wednesday that was marred by clashes outside parliament between police and university students calling for lower fee increases. His speech was disrupted as opposition lawmakers were ejected from the National Assembly for chanting “fees must fall” in support of the protesters.
The tension underscores the tough choices Nene is facing in trying to safeguard South Africa’s credit rating. Weakening tax revenue is putting pressure on the budget deficit, giving him less room to spur an economy close to recession and cut a 25% jobless rate.
“The government is now tightly stuck between the slowing economy - and tax revenue growth - and spending pressures, emanating from social-spending pressures, a rapidly growing wage bill and surging debt-service costs,” Rian le Roux, chief economist at Old Mutual Investment Group in Cape Town, said by email. “This squeeze highlights the need for urgent growth- friendly economic reforms.”
Nene cut this year’s growth forecast to 1.5% from 2% and predicted expansion of 1.7% in 2016, down from an earlier estimate of 2.4%. With the slowdown reducing tax revenue projections by R35bn over the next three years, the budget deficit will widen from earlier forecasts, reaching 3.3% in the fiscal year through March 2017 and 3.2% in the following year.
Interest payments on debt are rising the fastest of any other spending item in the budget, making another downgrade costly. Gross debt has surged from about 26% of gross domestic product from before the 2009 recession to reach almost 50% this year.
“The expectation that the public debt-to-GDP ratio will stabilise over the coming years looks optimistic,” William Jackson, senior emerging-market economist at Capital Economics in London, said in a note to clients. “We think that the debt ratio will grind higher and a sovereign-debt downgrade remains a distinct possibility.”
Community protests
Twenty-one years after the end of white minority rule, the ruling African National Congress is still struggling to meet the expectations of an electorate for a better quality of life. Official data shows 22% of the population of 55 million don’t get enough to eat and white households on average earn six times more than their black counterparts.
The student protests follow on a series of demonstrations by poor township residents demanding housing, education and other services. The police documented 2 289 violent community protests in the year through March 2014, up from 1 907 the year before.
Fitch Ratings has a negative outlook on South Africa’s BBB assessment, indicating that it may cut the nation’s debt from two levels above junk when it publishes its next review in December.
Standard & Poor’s and Moody’s Investors Service have stable outlooks on their assessments. Fitch’s rating is in line with Moody’s and one level above S&P.
“The issues that we’ve highlighted in our last report continue to be of concern; with low growth, which has been the background for the changes in the fiscal numbers going ahead, at the heart of the problem,” Ravi Bhatia, director of sovereign ratings at Standard & Poor’s, said by phone from London. The protests feed off the slow growth, he said.
Nene said he didn’t see any reason for a downgrade.
“It would be unfair for anybody to think that government is not taking the matter seriously of addressing the challenges brought about by the economic environment at home and globally,” he said in an interview after the speech.
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