Downgrades on their way soon, say analysts

The brutally honest mediumterm budget policy statement spells worrying news to come for SA as the economy falls deeper into a low-growth trap and the threat of further credit rating downgrades looms.

The Treasury slashed its economic growth forecast from 1.3% to 0.7% in the policy statement. Over the medium term, GDP growth is expected to rise to a muted 1.9% by 2020.

While the statement painted a realistic picture of SA’s woes, the worry is that the solutions spelt out in the National Development Plan (NDP) — relied on heavily by Finance Minister Malusi Gigaba — will continue to disappoint as the government fails to implement the plan.

Magnified by persistently low confidence levels, SA is straying further away from the NDP’s goals, which require economic growth of 5.4% per year and a 6% decrease in unemployment by 2030.

Speaking on Wednesday, Gigaba said: “Five years on from the adoption of the NDP Vision 2030, the fast growth that will enable us to make substantial progress in eliminating unemployment, poverty and inequality remains elusive. We must find the wisdom, the humility and perspective to ask how must we remake ourselves in order to build the SA we want.”

Despite this call, Gigaba provided little detail on how the Treasury would turn the situation around.

With credit rating reviews expected in November, economists fear Gigaba’s risky statement may plunge SA further into the subinvestment grade sooner than expected.

Ratings agencies have flagged persistent low economic growth as a concern.

Investec Asset Management co-head of fixed income Nazmeera Moola said: “He didn’t deliver what was expected, but it was a brave move. It’s quite a risky strategy, but it’s a worthwhile strategy.

“The Treasury is making the problem clear and they have to produce solutions in a short time,” she said.

But the risk remained that SA could be downgraded by S&P and Moody’s in November.

Moola said the breach in expenditure needed to be cured through the firm commitment to sell assets in the next couple of weeks, and a new Eskom board needed to be appointed.

BNP Paribas economist Jeff Schultz expects S&P and Moody’s to downgrade local and foreign currency ratings, which will trigger an exit from key global bond indices.

“Ratings agencies will undoubtedly view the MTBPS [medium-term budget policy statement] in a negative light. Not enough was done to instil confidence that fiscal consolidation remains front of mind for the Treasury,” he said.

Old Mutual Investment Group senior economist Johann Els said he was “totally shocked” by Gigaba’s speech.

“We all expected the minister to give us a path going forward for the fiscal deficit. There was nothing,” he said.

Gigaba had failed to provide an indication for investors, the market and credit ratings agencies that the outlook would improve, he said.

“It’s a given, and I am as certain as I can be, that we will be downgraded by S&P and Moody’s before the end of the year. We will see multiple downgrades in the next six to 12 months,” said Els.

Absa Stockbrokers & Portfolio Management chief investment strategist Craig Pheiffer said Gigaba promised no sugarcoating of the state of the economy. “Reduced growth, bigger deficits and higher debt paint a much weaker picture than that put forward in February.”

Absa acting head of asset consulting Kwaku Koranteng said the revision of the growth forecast implied lower than expected tax revenue and further fiscal challenges from a revenue-raising perspective.

“The growth outlook a year or two out continues to be relatively subdued and reflects the realisation that the economic outlook is subpar,” he said, adding that the market was expecting a bolder move.

Nedbank economist Dennis Dykes said the message from the medium-term budget policy statement was unambiguous: the government needed to get its political and policy house in order, otherwise further and rapid deterioration was likely.

“Without economic growth, other policies will be impossible to effect. It remains to be seen how that message will be received and whether the ruling ANC will be able to reform itself in time,” he said.