Fitch sceptical SA can return to fiscal health
• Fear of downgrade before ANC’s elective conference
Fitch, the first credit-ratings agency to issue an opinion on Wednesday’s medium-term budget statement, expressed strong scepticism on Thursday that SA could return to a path of fiscal consolidation, raising fear of a downgrade even before the ANC national conference. Finance Minister Malusi Gigaba, who engaged with ratings agencies immediately after his statement in Parliament, was at pains to emphasise on Thursday that although the numbers showed sharp deterioration, this was a temporary aberration.
Fitch, the first credit-ratings agency to issue an opinion on Wednesday’s medium-term budget statement, expressed strong scepticism on Thursday that SA could return to a path of fiscal consolidation, raising fear of a downgrade even before the ANC’s elective conference.
Finance Minister Malusi Gigaba, who engaged with ratings agencies immediately after his statement in Parliament, was at pains on Thursday to emphasise that although the numbers showed sharp deterioration, this was an aberration and would be corrected by February’s main budget.
But Fitch was clearly unmoved, saying in its statement that the widening deficit and growing debt burden suggested “a change in the direction of policy making away from a focus on fiscal consolidation”. This shift was occurring faster than it previously expected.
Fitch did not buy Gigaba’s assurance on Wednesday that a high-level team of cabinet ministers headed by the president, which had the task of considering proposals to shore up public finances for tabling in February, would deliver the solutions required. The deferring of decisions indicated instead that there was “no agreement on consolidation measures or even targets for revenue increases”.
In a clear sign that a ratings downgrade could come as soon as November, Fitch said “we think divisions in the ANC will persist beyond the party’s electoral conference in December, and it is not clear the political environment will become more conducive to consolidation”.
Addressing a sitting of several committees in Parliament on Thursday, Gigaba said: “We have not abandoned the path of fiscal consolidation .... We are saying that without action, debt will reach 60% of GDP if we let the situation slide, but it is not a foregone conclusion.”
Gigaba offered two reasons for his not providing a solution in the statement.
Sticking to the fiscal consolidation path would have required a R40bn cut in spending or an increase in taxation, which was not “something you can scratch your head and find”, he said. It was also important to “talk tough to our own selves” about a “seeming complacency” among fellow ANC leaders.
In similar vein, S&P Global Ratings said the direction of South African politics would probably trump near-term macroeconomic performance, particularly for the country’s investment grade local currency credit rating.
Fitch and S&P rate South African foreign currency debt in subinvestment, or junk, territory. However, only Fitch has the country’s local currency debt in junk. Moody’s rates both the foreign and local currency debt a notch above speculative grade.
S&P and Moody’s are due to review SA in November. Fitch has not published its review calendar for the country.
Meanwhile, hopes for another interest rate cut at November’s monetary policy committee (MPC) meeting were almost dashed on Thursday by the release of a sharp increase in producer inflation and the uninspiring medium-term budget policy statement.
Data from Statistics SA on Thursday showed that the producer price index for final manufactured goods, considered the headline figure, rose 5.2% in September compared with a year earlier after climbing to 4.2% in August.
“Producer inflation is expected to remain below 6% for the remainder of the year and into 2018. There are, however, upside risks to the inflation outlook stemming mostly from food prices as well as energy prices and the currency,” Nedbank economist Busisiwe Radebe said.
The rise may quash projections of an interest rate cut, which would have alleviated strain on consumers.
“But rand volatility ahead of the ANC’s elective conference in December has reduced the chances of an early interest rate reduction,” she said. “We forecast cuts at the January, March and May meetings of the MPC.”
The MPC is scheduled to meet on November 23, a day before agencies are expected to review SA’s credit rating.
WE THINK DIVISIONS IN THE ANC WILL PERSIST BEYOND THE PARTY’S ELECTIVE CONFERENCE