Mini budget could be too much for ratings agencies

2016-10-27 18:10 - Carin Smith

Cape Town - The mini budget has stretched pragmatism and space allowed by ratings agencies to the max - and maybe even beyond, emerging markets economist Peter Attard Montalto of Nomura said in reaction to mini budget.

"Ultimately, the agencies will have to decide if they believe this is the right budget outlook and set of risks for the environment. We keep our probabilities of downgrades (to external debt ratings) as a result of the mini budged unchanged at 40% for Moody’s, 60% for S&P and 80% for Fitch," said Montalto.

"Overall, there is a hefty reliance on underspend, significant tax hikes and some consolidation measures, as well as utilising contingency reserves to tie the whole thing together. For us there remain significant risks, especially below the line. We think there was nothing of note here that is new to shift the ratings agencies from their existing biases."

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Nomura still sees a downgrade from S&P and Fitch in December, but an unchanged view from Moody’s at the end of November.
"This mini budget was all about political context and the stresses the internal war within the ANC has put on National Treasury. In that sense, it was achievement alone for Pravin Gordhan to deliver it. Not only was there a political tightrope, but a ratings and markets one as well," said Montalto.
"Clearly, the difficult tightrope of lower revenues and expenditure pressures (from debt service costs and inappropriate expenditure) meant the boundaries had to be pushed where possible, and in the end that turned out to be a wider profile for the consolidated headline and primary deficits and, in turn, higher debt and issuance numbers."

Nomura still thinks the key for the agencies remains the growth outlook in the long run and the structural reform agenda.

In his view, either National Treasury believes there is enough benefit of the doubt from the agencies to take such a risk, or they believe the agencies won’t downgrade in this political environment for fear of making things worse, or they were happy to take the risk. Montalto thinks most likely it was a mix of all three.
"The fundamental risk to the budget in the medium run, however, remains the lack of the sluggish pace of absolute growth levels, the slow recovery, and also that National Treasury, whilst making further revisions down to the growth trajectory, still pencils in too much growth in the long run," said Montalto.

"Clearly a large amount of political risk resides before the budget in February for actually finding R28bn of revenue increases through tax hikes. The risk here, then, is that collection assumptions have to be stretched for policies in such a situation or even less revenue is assumed and so more has to be done on expenditure. The fall-back, of course, can just be a VAT hike, combined with greater corporate taxes and taxes on the wealthy, which are more politically acceptable."

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