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Mini budget unlikely to lead to rating downgrades

Johannesburg - The mini budget's focus on the expenditure ceiling is positive for the investment climate and for the country's credit ratings, Investec said on Wednesday.

"The medium-term budget policy statement (MTBPS) clearly conveyed the message that expenditure will be contained, and where possible reduced, and that there is no space for any additional allocation of resources without jeopardising the health of public finances," Investec group economist Annabel Bishop said in a statement.

Specifically, it said the economic and fiscal outlook had weakened, just as space for counter-cyclical policy interventions had narrowed.

"There has been a clear shift in this year's MTBPS toward curtailing costs and maintaining expenditure within previous limits, and this focus on the expenditure ceiling is positive both for the investment climate and South Africa's credit ratings," she said.

However, the key ratios watched by the rating agencies had markedly widened, the period of fiscal consolidation had been pushed out, and the fiscal deficit was wider for 2014/15 and 2015/16.

"Furthermore, net debt as a percentage of GDP is now forecast peaking at 43.9 percent of GDP in the final year of the MTEF (2016/17), while previously the peak was estimated at 40.3 percent of GDP.

"However, this is partly due to the downward revision to the economic growth forecasts of 2.1 percent year-on-year in 2013 from a forecast of 2.7 percent in February and then averaging 3.2 percent from 2014 to 2016 compared to the 3.7percent forecast for 2014 and 2015 in February."

Bishop said the main budget borrowing requirement was revised lower for 2013/14, to -R168.5bn from -R178.1bn, but rose to R183.6bn in 2015/16 from the previous estimate of R151.9bn.

"The rating agencies will need to weigh up the deterioration in the budget deficit and debt projections (as percentage of GDP) against the positive news on the curtailment in expenditure, particularly that of inefficiencies and wastage in expenditure effected by the civil service when reviewing the sustainability of South Africa's public sector finances," she said.

A second positive of the mini budget was that the budget deficit dropped to an estimated -4.2% of GDP for 2013/14, compared to the previous projection of -4.6% of GDP.

"The 2012 MTBPS said in a lower-growth scenario, an appropriate balance between spending restraint and new revenue initiatives would be necessary, taking into account the need to limit the potential impact on growth, employment and equity.

"This shift in thinking continues, leaning now towards increased spending restraint."

Bishop said the government's commitment to the national development plan was reiterated, as were measures to address youth unemployment and improve the investment climate.

"However, it is not clear whether the positives will be enough to prevent a sovereign rating downgrade as a result of the deterioration in the projected debt and deficit ratios, given that economic growth has slowed sharply and the current account deficit widened this year," she said.

"In particular, Standard and Poor's has previously warned that it will downgrade South Africa's long-term foreign currency rating 'if the government's fiscal flexibility decreases, particularly if public sector wages or debt service costs increase more than we currently expect', or 'if South Africa's business and investment climate weakens more than we currently expect, for instance as a result of production cost increases, and if this then leads to lower growth rates and increased pressure on South Africa's balance of payments'."

Standard and Poor's (S&P) South Africa director Konrad Reuss had said there was some positive news in the 2013 mini budget that would not lead to any rush to review its current position, which was a negative outlook on South Africa's sovereign long-term foreign currency rating of BBB, although he said risks remained.

"While it is not clear whether the 2013 MTBPS will lead to a downgrade of South Africa's credit ratings, we currently believe on balance that it will not, and so South Africa's rating of BBB from S&P and Baa1 from Moody's will remain this year," said Bishop.

"Exchange controls have not been loosened. No changes either were made to inflation targeting, but then none were expected. No new information was given on the [national health insurance]. No changes were made to taxation, but none were expected as the Davis Tax Commission has not completed its review.

"The planned sharp curtailment of future costs and abuse of government spending is a serious move to reduce the burden the civil service places on government finances and as such is to be applauded.

"If sufficient savings are made in the eradication of instances of civil service wastage, inefficient use of, and theft of public finances then any recommended tax hikes could potentially be reduced or eliminated," she said.

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