Credit-rating cut gloom
Economists fear poor economic growth and political uncertainty could hamper recovery
ALTHOUGH South Africa’s economy improved this year, issues such as low economic growth, student protests and political uncertainty could hamper the country from avoiding a credit ratings downgrade.
These are some of the issues Finance Minister Pravin Gordhan will have to grapple with during his Medium Term Budget Policy Statement (Mtbps) tomorrow, say experts.
Sanlam Investments economist Arthur Kamp said: “The question is whether the budget will be sufficient to stave off the risk of a credit rating downgrade. In June Standard and Poor’s (S&P) credit rating agency affirmed South Africa’s long-term foreign currency bond rating at BBB- (one notch above junk status) and its long-term local currency rating at BBB+ (three notches above junk status), while maintaining its negative outlook on the rating.”
Old Mutual Investment Group’s senior economist, Johann Els, said while the economy remained in a vulnerable position, the overall environment had shown signs of improvement from earlier this year. “Times are still difficult and pressure remains on the national Treasury to keep to February’s fiscal targets, one of the key requirements in the efforts to maintain South Africa’s investment grade credit rating.
“However, we believe that the Treasury will mostly be able to meet these targets, despite downward pressure on revenue from a weaker than expected economy.”
Peter Brooke, fund manager of the Old Mutual Flexible Fund, said Gordhan would have the difficult task of finding an acceptable balance between the seemingly conflicting priorities of the rating agencies and the public sector.
“In spite of growing demands for additional allocations of funds, such as the widely recognised need to increase the subsidy to higher education institutions, ratings agencies will be focused on whether the Treasury has managed to control spending.”
Elna Moolman, senior economist at Macquarie, a global financial services provider, said the ratings agencies gave the government credit for commitment to its fiscal consolidation path.
She said this expectation would be met when judged by metrics such as adherence to the expenditure ceiling, a gradually narrowing deficit, a return to a primary budget surplus and finally ending the government wage bill growth and beginning to address corruption.
“Unfortunately, despite this fiscal consolidation commitment and some incremental, growth-friendly developments, the rating agencies will likely not be pleased with the mixed progress with SOE reform and lingering policy uncertainty or the possible increase in the debt ratio.
“We suspect the market is pricing in a downgrade by S&P and potentially also one by Moody’s, but any indication that more downgrades could be under way in the medium term would likely hurt the currency and bond market.”
Gerhard van Onselen, economic researcher at Solidarity’s research institute, said: “Along with needed cuts to unnecessary government expenditure, we would like to see a careful evaluation and subsequent removal of regulations and policies, and political misbehaviours which hamper the private sector from properly adjusting to the current economic realities.”
He said a restoration of private sector growth was the only sustainable solution to the present economic malaise.
Kwaku Koranteng, senior asset consultant at Absa Asset Consultants said recent demands and protests by students for more financial support at higher education levels did not make things any easier.
“We can expect the minister to indicate some corrective expenditure and revenue measures in the upcoming budget for the 2017/2018 year without providing the exact detail yet.
“This means that he may indicate the future implementation of measures to curtail government spending and increase taxes. If there are tax increases, we think that the consumer will be most impacted, either via an increase in excise duties, adjusting the tax bracket and possibly another increase in the top marginal tax rate.”
Momentum Investment’s economists Sanisha Packirisamy and Herman van Papendorp said: “Lukewarm economic growth prospects over the medium term will likely struggle to keep up with population growth, leading to a minimal recovery in overall living standards and social inequality.
“We still expect SA to be downgraded to sub-investment grade by S&P over the next nine months as sluggish GDP growth poses a risk to fiscal consolidation and debt stabilisation in the medium term.”