Downgrade may stall Zuma’s free-fees plan

Treasury hints at phased-in strategy S&P opts not to wait for ANC conference, junks SA

The Treasury has strongly hinted President Jacob Zuma’s free-fees plan is being revisited and will be phased in more gradually than initially mooted.

A promise to do this and to implement a package of measures to tackle the budget shortfall appear to have helped to persuade at least one of the ratings agencies to hold fire on a downgrade ahead of the ANC’s elective conference in December and the budget in February.

But S&P Global Ratings opted not to wait, downgrading SA’s ratings on Friday. Its view is that whoever wins the ANC’s presidential race will face a similarly tough economic challenge and that measures to tighten the budget further could worsen SA’s growth outlook, at least in the short term.

S&P junked SA’s local currency rating and took its foreign currency rating further into junk territory.

Rival Moody’s put SA on review for a downgrade, giving itself until after the February budget to make a decision.

Fitch, which junked SA’s ratings in April, last week affirmed the ratings, saying potential fiscal consolidation after the ANC’s conference could mitigate the deterioration shown in October’s mediumterm budget policy statement.

In response to the S&P and Moody’s decisions on Saturday, the Treasury said that measures were being considered to improve access to higher education for all deserving students and that the president had directed that these be implemented in a fiscally sustainable manner. “Given the nation’s financial constraints, this necessarily implies a phased approach focusing on the neediest students,” the Treasury’s said.

It said it was working with the president and the Department of Higher Education to finalise the new model for higher education, “which will be announced in the near future”.

The Treasury’s comments come after news leaked following the October policy statement that Zuma was to announce a R40bn fee-free package and had instructed the Treasury to find the money by cutting other budgets, prompting the depar-

ture of Treasury budget office head Michael Sachs.

The Treasury also said the presidential fiscal committee and Cabinet would over the next two weeks consider a package of measures to stabilise the public debt over the next decade, promising details in February.

However, its promises failed to avert a downgrade by S&P of SA’s local currency rating to sub-investment grade, or junk status. The downgrade would see SA’s domestic bonds ejected from the Barclays Capital Aggregate Bond index, potentially triggering capital outflows of about R70bn as bond investors obliged to track that index sold out their holdings, said Investment Solutions chief economist Lesiba Mothata.

Investors tracking the Citi World Government Bond index would not need to sell yet, but should Moody’s downgrade early in 2018, this could induce further outflows of about R140bn, Mothata said.

The rand weakened from R13.89/$ to R14.10 immediately after the S&P announcement on the prospect of the sell-off.

S&P senior director: sovereign ratings Frank Gill said S&P’s ratings committee had considered waiting until after the elective conference but was of the view that “whoever the ANC decides to nominate as the party leader and potential next president is facing a very tough economic challenge”.

Gill said the key rationale for the downgrade was SA’s weak growth performance, which is the worst among the emerging markets S&P rates and underlay the fiscal deterioration in October’s budget statement.

Though the agency was fairly confident the Treasury would announce measures in February’s budget on the expenditure and revenue sides to offset the shortfall, Gill said: “Tightening the budget further may well worsen the growth outlook.”

Moody’s said its review would allow it to assess SA’s willingness and ability to respond to weaker growth prospects, revenue shortfalls and spending pressures through growth-supportive fiscal adjustments, as well as structural economic reforms that ease domestic bottlenecks to growth and improvements to stateowned enterprise governance.