More bad news for SA from Fitch

Johannesburg – Yet another credit rating agency is concerned about South Africa's creditworthiness.

On Friday Fitch Ratings lowered its outlook for South Africa's credit rating from stable to negative. This reduction related specifically to the issuing of long-term debt.

In November last year Moody’s made a similar negative adjustment.

On Friday afternoon, in reaction to the news, the rand weakened almost 2.5% tot R8.22.

Purvi Harlalka, director of Fitch’s division for sovereign credit ratings, said the negative outlook had to do with structural issues that had over time begun to begun impair South Africa’s economic performance.

“The economy’s inability to create enough jobs is one of the problems requiring urgent attention.”

Harlalka says that country’s high unemployment rate not only constrains economic growth, but has also resulted in state expenditure focusing increasingly on redistribution.

In November Moody’s said it was concerned that pressure to relieve poverty and unemployment would encourage the government to spend more than it could afford. The agency reckons government may not be able to maintain its resolve to keep the budget deficit in check.

Fitch says South Africa’s public finances still deserve a good rating, but the recession has wiped out any fiscal room to manoeuvre.

“By the first quarter of 2013 the four-year budget deficit will average 5%, and indebtedness will amount to 42% of the gross domestic product.”

Fitch reckons the higher level of indebtedness and the fact that 52% of the national budget goes on salaries and social expenditure, significantly reduces South Africa's ability to handle economic shocks.

In reaction to Fitch’s decision, Treasury said state expenditure over the next three years would increase only moderately.

It said that South Africa remained committed to changing the composition of expenditure from consumption to investment, and to keep the rising wage account in check.

Government also envisages keeping to the medium-term budget framework that Finance Minister Pravin Gordhan presented in October. According to this framework, by 2015 South Africa’s public debt will amount to around 40% of the gross domestic product.

Jeff Gable, an economist at Absa Capital, says since similar things bother both Fitch and Moody’s. He says the ANC’s policy conference taking place in June this year will probably give relevant indications of the likelihood of policy changes with regard to nationalisation and land reform. Decisions taken in June will however be announced only in December.

“The importance of the policy opportunities in June and December indicates that any significant change to the credit rating would follow the political process.”

Government bonds are popular with foreign investors.

Treasury last week had no difficulty in disposing offshore of $1.5bn worth of government bonds with a 12-year maturity. The auction attracted bids worth $3bn and the bonds were sold at a 4.66% rate of return.

This rate was only 270 basis points higher than that investors receive on US government bonds with a 10-year maturity.

This means that investors require only 2.7 percentage points more in interest than that offered by US bonds – which are regarded as a safe haven – to lend the South African government money.

Henk Viljoen, head of fixed-interest investments at Stanlib, says the return is considerably lower than the rates Spain and Italy have to pay.

“As South Africans, we can pat ourselves on the back that we can now borrow at rates that compete with the yields from countries we have always looked up to.”

Viljoen says that last year foreigners bought more than $50bn worth of South African bonds, and they will probably continue diversifying into emerging markets which show stronger economic growth.

Wikus Furstenburg, portfolio manager at Future Growth Asset Management, says foreign investors are often less concerned with how a country like South Africa manages its finances.

“They compare various countries and look at the bigger picture. The risk of emerging markets going through the drama that Greek has experienced, is slight.”

Furstenburg says South Africa’s finances look better in broad terms than do those of many developing countries, but there are nevertheless matters requiring attention.

He also warns that once a country has started to increase social spending it subsequently becomes very difficult to reduce it.

On Friday afternoon the rand weakened by almost 2.5% to R8.22.

 - Sake24

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