Fitch frets over ANC factional tensions

Cape Town - The main challenge to fiscal consolidation in SA comes from factional tensions in the ANC, which are diverting political energy from economic reform and may lead to policies that raise fiscal deficits or undermine the stability of state-owned enterprises (SOEs).

This is the view expressed by ratings agency Fitch in reaction to Budget 2017.

"We think political risks to governance and policy-making will remain high at least until the ANC's electoral conference in December. This is reflected in the Negative Outlook on SA's "BBB-" sovereign rating," Fitch said in a statement.  

Budget 2017 shows that deficit reduction remains an important policy aim, but in the view of ratings agency Fitch, political and social pressures will test the SA government's commitment to fiscal consolidation.

Fitch said on Friday that Budget 2017 broadly maintains fiscal settings and macroeconomic forecasts and clarifies revenue measures promised last year. It cautioned that sustainable consolidation remains reliant on a still-fragile recovery of gross domestic product (GDP) growth.
 
"The slightly higher deficit forecasts for 2018/2019 and 2019/2020 reflect the fact that tax buoyancy - the ratio of tax revenue growth to nominal GDP growth - for 2016/17 was revised down to 0.88 in the budget from 1.07 in the Mini Budget due to weak tax receipts," Fitch said.

"No similar adjustments were made for subsequent years. We do not incorporate similar deterioration in our fiscal forecasts, but it does create uncertainty. If tax buoyancy were over-estimated by the same amount this fiscal year, revenue would fall short of official projections by 0.4% of GDP."

On a positive note for Fitch, it pointed out that Budget 2017 delivers measures to raise tax revenue by R28bn in 2017/18, meeting commitments made in last year's budget and the Mini Budget. These include incomplete adjustment of tax brackets to inflation, a new top marginal income tax bracket of 45%, an increase in the withholding tax rate and a number of indirect tax rises.
 
"The expenditure ceilings, a core part of the fiscal framework, were raised for the first time since their introduction, but by negligible amounts. We do not believe this signals any change in the commitment to consolidation, although it highlights how tight room for cutting expenditure has become," said Fitch.

Debt guarantees

Earlier Fin24 reported that ratings agency Moody’s said in reaction to Budget 2017 that it is concerned over the SA government’s debt guarantees relative to GDP, which pose a risk to the fiscal position.

Finance Minister Pravin Gordhan said that government debt was expected to stabilise at 48% of GDP over the next three years. He added that the budget deficit for 2017/18 was in line with Treasury’s fiscal consolidation commitment at 3.1% of GDP.

“While government guarantees relative to GDP are also projected to stabilise, their actual drawdowns are rising and represent increasing risks to the government’s fiscal position,” Moody's said.

In November last year, Moody’s kept South Africa’s sovereign rating unchanged at Baa2 with a negative outlook. Moody's warned that if SA doesn't accelerate economic growth, the country risks being downgraded.

Fin24 previously reported that among the risks to fiscal consolidation include the macroeconomic outlook, budget execution, policy uncertainty and financially distressed state-owned companies.

Relatively neutral

In reaction to Budget 2017 Jeffrey Schultz, economist at BNP Paribas, said ratings agencies are likely to view Gordhan’s budget in a relatively neutral light.

According to Schultz, although the Treasury managed to avoid further GDP growth downgrades (for the first time in six years) and stuck to its lowered expenditure ceilings announced in the medium-term budget policy statement last October, ratings agencies may be disappointed by the fact that South Africa will only have a budget surplus by the 2018/19 – a year later than what was promised in October.

“We believe ratings agencies will be disappointed that the finance ministry is kicking the can down the road in much the same way as its debt-to-GDP profile has evolved,” Schultz said.

Ratings agencies may also be underwhelmed by the lack of meaningful breakthroughs on much needed economic growth reform initiatives, in his view.

Herman van Papendorp and Sanisha Packirisamy from Momentum Investments also commented that rating agencies are likely to take comfort from the fact that government remains committed to fiscal consolidation.

“Nevertheless, unfavourable economic conditions and the absence of bolder reform efforts could still, in our view, lead to a downgrade by the end of the year as downtrodden business and investor confidence continues to hinder SA’s longer-term growth prospects, leaving South Africa’s fiscal and debt metrics susceptible to adverse shocks,” they said.

They also believe that disparaging political developments could tarnish the rating agencies’ view of SA’s institutional framework.

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