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Cape Town – A further rating downgrade for South Africa is unlikely, according to Finance Minister Nhlanhla Nene.
Speaking ahead of his second mini budget speech on Wednesday, Nene told media the government is doing everything it possibly can to cut spending, reduce debt and increase growth.
“We are in a position of stabilising our debt, which is one of our risks, and staying the course on fiscal consolidation,” he said. “There is no reason for a downgrade, but I can’t speak on behalf of ratings agencies.”
S&P have given SA a BBB- rating, which is one short of junk, while Moody’s has given the country a Baa rating, which is just two shy from going junk.
Treasury announced a R7.6bn shortfall in tax collection in 2014/15, but said continued revenue growth and strict adherence to the planned expenditure ceiling are projected to result in gross debt stabilising at 49.4% of gross domestic product in 2018/19.
“It is not possible to please the ratings agencies all the time, but our starting point is what we have put before the nation in the 2015 budget and the 2014 mini budget,” he said. “We have been able to stay the course.”
Consistency
“The ceiling and discipline we put in place will sustain us,” said Nene. “Economic growth and revenue have not been on our side, but we were able to maintain expenditure.”
Treasury directory general Lungisa Fuzile said he hoped the rating agencies would take into consideration how consistent Treasury has been in staying this course.
The 2015 mini budget proposes steps to stabilise debt and improve the efficacy of spending, while adding new fiscal guidelines for progressive fiscal management, Nene said in the foreword of his budget.
In these unsettled times, growing public debt makes SA vulnerable to shocks that could set back prospects for faster growth over the long term, he said.
Failure to stabilise the growth of public debt would further erode the composition of spending and increase the risk of a shock to the economy, the mini budget explained.
“A ratings downgrade, for example, could induce a sudden outflow of foreign capital and sharply higher interest rates,” the document said.
"Given South Africa’s reliance on foreign lending to finance investment, such a development would compromise the country’s ability to sustain growth and social progress.”
The expenditure ceiling remains the primary tool to stabilise debt, the mini budget explains. No resources will be added to the spending ceiling over the next two years as a result.
Spending ceiling
Beginning with the 2016 budget, government will align spending limits in the outer year of the medium-term expenditure framework with the long-term path of GDP growth, building on government’s counter -yclical and sustainable approach to fiscal management.
This fiscal rule of thumb will link the spending ceiling to South Africa’s long-term economic growth projections, Treasury explained.
Estimates of real long-term growth vary. Over the past 20 years, real GDP growth has averaged 3% per year. The International Monetary Fund estimates real GDP growth of 2.6% in 2020, while the Reserve Bank estimates potential output growth at 2.1% in 2017. The expenditure ceiling has been set to grow by 2.5% in real terms in 2018/19, Treasury said.
“In good times, spending will grow more slowly than the economy, and in bad times, spending will outpace GDP growth,” the mini budget says. “All South Africans will be able to share in the benefits of economic expansion on a sustainable basis.”
