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Cape Town – President Jacob Zuma wants a committee to show him progress this week on plans to cut government spending by R25bn and raise taxes by up to R15bn, following the latest ratings downgrade to junk status by Standard & Poor’s on Friday.
LATEST: Despite ratings downgrade, demand for local bonds boosts rand
With Fitch and S&P having downgraded the country’s foreign and local rating to junk status, all eyes are now on Moody’s, which placed the country on ratings downgrade review last Friday. It plans to wait until South Africa’s budget review in 2018 before making a final decision. Its ratings are currently one notch above junk.
Should Moody’s also downgrade the local-currency rating, rand debt would fall out of gauges including Citigroup’s World Government Bond Index, which could spark outflows of as much as R100bn, Citigroup economist Gina Schoeman said ahead of the rating company announcements.
Two key issues seem to have pushed South Africa closer to a full junk status downgrade: the R40bn fiscal gap that will see the country breach its fiscal framework, and Zuma’s controversial university free-fees plan.
In a statement on Monday, the president addressed both of these concerns.
Zuma said he directed Gigaba and the Presidential Fiscal Committee to identify concrete measures to urgently address the challenges identified in the mini budget in October.
“The president as well as Cabinet have reaffirmed government's commitment to maintain a sustainable fiscal framework and to ensure that a solution is found to address the roughly R40bn gap that has been identified, through a combination of expenditure reductions and revenue-enhancing measures,” the Presidency said in a statement.
Zuma directed that technical discussions would focus on four areas, which would then form the basis of the 2018 budget:
1. “To identify and finalise proposals for cuts in expenditure amounting to about R25bn. Such proposed cuts should not be in areas that will negatively affect economic growth prospects and job creation.
2. “To identify and finalise proposals for revenue-enhancing measures amounting to about R15bn, including where appropriate, tax measures.
3. “To develop a phased-implementation plan to enable the proposal for fee-free higher education for students from poor and working-class backgrounds, to be implemented in a fiscally-sustainable manner.
4. “To identify the package of economic stimulus measures that will be implemented to enable the economy to grow at a faster rate.”
Zuma will meet with the Presidential Fiscal Committee this week to receive a progress report on the work done on the above, the Presidency said.
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