Cape Town - South Africa’s fiscal maths will not work out unless GDP lifts, which puts the country at risk of a credit ratings downgrade, according to Arthur Kamp, investment economist at Sanlam Investments.
On Friday, Moody’s Investors Service will announce its findings on the state of affairs of South Africa’s state-owned enterprises (SOEs), while Fitch and Standard & Poor’s (S&P) on 2 December will decide if South Africa’s debt rating warrants a downgrade to sub-investment grade (also called junk status).
Although National Treasury has built an admirable track record in sticking to its expenditure targets in recent years and made clear its intent to stabilise the debt ratio, South Africa is not exempt from a downgrade, said Kamp.
“The fiscal maths do not work out if GDP growth does not lift. The shift towards improved co-operation between government, labour and business to address some of the policy uncertainty and constraints to growth in recent weeks may grant South Africa more time. But, that unfortunately would not imply we are out of the woods.”
READ: SA's weak growth a stumbling block to reducing debt
He emphasises that the “quantitative factors” the ratings agencies look at include:
- potential GDP growth;
- the trend in per capita income; and
- government’s debt trajectory (including guarantees issued to state owned companies).
“These have not improved sufficiently since Standard & Poor’s (S&P) added a negative outlook to SA’s BBB- rating on its foreign currency debt. It is this rating which has received the most attention, since it is just one notch above investment grade.”
Foreign vs. local currency
Kamp points out that Fitch also rates South Africa’s foreign currency debt as BBB-, but with the difference that it has assigned a stable outlook to the country.
“In the case of S&P it’s important to distinguish between SA’s foreign currency and local currency debt ratings. The former speaks to our ability to repay our debt in foreign currency (only 10% of government’s total debt). S&P rates our domestic currency debt higher at BBB+,” Kamp said.
Debt and unemployment worse
Even though additional spending cuts and tax increases were announced in the October 2016 medium-term budget policy statement, National Treasury revised upwards its projections for our debt ratio.
“And, given an unemployment rate of 27.1%, the risk to government’s expenditure projections and hence fiscal sustainability is significant,” he says.
All these factors put South Africa at significant risk of a credit rating downgrade in the near future.
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