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Economist slams Treasury response to downgrade

Apr 03 2017 20:12
Matthew le Cordeur

Cape Town – National Treasury’s response on Monday to the rating downgrade to junk status by Standard & Poors has been highly criticised by an economist.

National Treasury is now led by Finance Minister Malusi Gigaba and deputy Sfiso Buthelezi, who have been hard at work since Friday trying to persuade ratings agencies that they will retain the current fiscal and spending policy framework.

Their response to the rating downgrade on Monday was to reassure the market and other rating agencies, saying in a statement that they are “committed to a predictable and consistent policy framework, which responds to changing circumstances in a measured and transparent fashion”.

However, Treasury went on to express a desire to move away from a reliance on foreign debt, to escape the conservative eyes of Western ratings agencies, which seeks political, economic and social stability.

“Reducing reliance on foreign savings to fund investment and relying less on debt to finance public expenditure will secure South Africa’s fiscal sovereignty and economic independence,” Treasury said.

Govt would have to cut jobs - economist

Economist Dawie Roodt said the above statement means we have to spend less on current expenditure and cut back on expenditure. “Most of the expenditure goes to salaries on civil servants,” he said. “We would need to cut back on civil servants.”

“It was compiled by someone who doesn’t know anything about economics,” he said.

“South Africa is a savings deficit country,” said Roodt. “Even under former finance minister Pravin Gordhan, the state was a huge destroyer of capital. SA invests far more than we save.”

SA to borrow R149bn in 2017

Gordhan was fully aware of this challenge and worked hard with Treasury to lower the spending ceiling and proposed raising taxes by R28bn this year.

The proposed budget for 2017/18 totals R1.56trn, of which revenues cover R1.41trn, Treasury explained in its Budget Review this year. “The remainder – R149bn – will be borrowed.”

The cost of borrowing will now increase as a result of the ratings downgrade, as government will have to pay more on debt costs. Treasury expects to pay R162.4bn in debt costs this year.

“Debt-service costs, which amount to R162 billion in 2017/18, continue to be the fastest-growing element of the budget, diverting critical resources from frontline services,” Treasury said in its Budget Review.

“For every R1 collected in tax, 13c must be diverted to service debt.

“Government debt now stands at R2.2trn, or 50.7% of GDP, and interest payments continue to grow rapidly,” Treasury said in its Budget Review. “By acting now to stabilise debt, government is ensuring that future generations will not be paying taxes for today’s expenses 20 or 30 years from now.”

Downgrade has been priced in

Roodt said the ratings downgrade was priced in already, which is why the rand and bonds market have not reacted as dramatically as some might have expected.

“We have been paying a very dear price already,” he said. “The Zuma administration has been costing us for some time.”

“Once Zuma is gone, things will get better,” said Roodt. “If we get rid of our source of misery, then SA is a screaming buy. The rand is hugely undervalued.”

Moody's is set to announce their ratings review on South Africa on Friday. It has the country's bonds two notches above junk status, while Fitch has South African just one notch above junk status.

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