Growth woes frustrate SA’s effort to avoid junk rating

2016-10-28 07:01 - Mike Cohen and Arabile Gumede
Finance Minister Pravin Gordhan. (Photo: Matthew le Cordeur)

Cape Town - Finance Minister Pravin Gordhan demonstrated his commitment to fiscal discipline with a budget update that provides for additional taxes and spending curbs over the next two years.

That may not be enough to fend off a junk credit rating, as doubts remain over the government’s ability to reignite growth and quell political turmoil.

S&P Global Ratings, Fitch Ratings and Moody’s Investors Service are due to review South Africa’s credit rating in the next few months and have identified low growth, rising debt and political uncertainty as key risks in their assessments. S&P and Fitch rate the nation’s debt at one level above junk.

George Herman, head of South African portfolios at Citadel Investment Services in Cape Town, puts the risk of a downgrade by year-end at 60%, and at 100% “over a longer time-scale,” largely because of weak economic growth and a lack of political will to address that.

“I do not think that the budget has changed the outlook for ratings agencies whatsoever,” Herman said by phone. “If the government could be more clear on policy then we could have more certainty in our environment. We would require some bold moves by political leadership, and for now it’s just difficult to see what that can emanate from.”

Gordhan  has led efforts to stave off a downgrade to junk while simultaneously wrangling with President Jacob Zuma over the management of state companies and the national tax agency and battling off a charge of fraud for approving the early retirement of a former revenue service colleague-- a case he says is a political stitch-up.

The minister pledged to limit rising debt that the rating companies have warned is a threat to the nation’s credit-worthiness. A downgrade may lead to higher borrowing costs and capital outflows.

Gordhan trimmed forecasts for economic growth by 0.4 percentage point for each year until 2018, projecting expansion of 0.5% this year, rising to 2% by 2018. He expects the budget deficit to be 3.4% of gross domestic product in the current fiscal year and 3.1% in 2017/18. That compares with 3.2% and 2.8% respectively forecast in February.

“Fiscal consolidation in the medium-term budget policy statement is mostly on track, but will continue to be challenged by slow progress and uncertainty around structural reforms to support growth,” Moody’s Vice President Zuzana Brixiova said by e-mail.

“Key fiscal risks to the budget delivery and hence to South Africa’s credit quality include lower-than-projected growth, emerging wage pressures, and rapidly rising contingent liabilities related to financially weakened state-owned enterprises.”

While the National Treasury plans to raise an extra R43bn in taxes and trim the government’s expenditure ceiling by R26bn over the next two years, gross and net debt ratios will peak at higher levels and later than previously forecast. The Treasury acknowledged that reining in the deficit and government spending may constrain growth and stressed the need for greater policy certainty and higher levels of private investment.

“Poor economic performance remains the main impediment to debt stabilisation, but government measures to boost trend growth performance constitute fine-tuning rather than meaningful reform,” Fitch Senior Director Jan Friederich said by e-mail. “Efforts to reduce legal uncertainty in the mining sector or improved visa processing, will not be sufficient to raise business confidence substantially in the near-term. Progress has been made on alleviating electricity shortages, a key factor that had held back growth in recent years.”

Growth story

Moody’s, which rates South Africa at the second-lowest investment grade, is due to review South Africa’s rating on November 25 and S&P a week later. Fitch is scheduled to visit the country in December.

“The poor growth story is really at the heart of the matter,” Ravi Bhatia, director for sovereign and international public finance ratings at S&P Global Ratings in London, said by phone on Wednesday. “We are still worried about the growth story and whether the growth trajectory is going to improve.”

While Gordhan delivered the best budget he could under the prevailing circumstances, his efforts may not be enough to appease the rating companies, according to Abri du Plessis, a fund manager at Gryphon Asset Management in Cape Town.

“It’s not only up to him and economics at this point in time,” Du Plessis said by phone. “Unfortunately our politics does play a huge role. If they only have to look at economics, I think that there’s a better than 50% chance that they wouldn’t downgrade us, but one would need some political stability for that to happen.”

* Visit our Budget Special for all the budget news and in-depth analysis.

Read Fin24's top stories trending on Twitter: