Fitch raises red flag after mini budget
Move from fiscal consolidation a big worry
RATINGS agency Fitch said yesterday that Finance Minister Malusi Gigaba’s MediumTerm Budget Policy Statement (MTBPS) heralded a move away from fiscal consolidation, a comment which added to the speculation about possible further ratings downgrades.
Fiscal consolidation – which entails steps and measures that the government must take in order to reduce the Budget deficit and slowing the pace of debt accumulation – has been the government’s focus to ignite growth and boost confidence in the economy.
But Wednesday’s MTBPS laid bare South Africa’s dire fiscal position.
Tax revenue is projected to fall short of the 2017 Budget estimate by R50.8 billion in the current year, while the consolidated Budget deficit is expected to widen to 4.3 percent of gross domestic product (GDP) in 2017/18, against a 2017 Budget target of 3.1 percent of GDP.
This has heightened fears of further ratings’ downgrades.
In a statement yesterday, Fitch said Gigaba had not revealed measures to contain the impact of the deficit and the debt.
“This suggests that the change in direction of policy-making away from the focus on fiscal consolidation that we anticipated as a consequences of March’s cabinet reshuffle is under way and occurring faster that we had anticipated,” the agency said.
In April, Fitch and S&P Global downgraded South Africa’s credit rating to so-called junk status.
This was in the aftermath of the March 31 cabinet reshuffle, which saw Gigaba replace Pravin Gordhan.
At the time, Fitch said the cabinet changes were likely to result in a change in the direction of economic policy. “The reshuffle partly reflected efforts by (Gordhan) to improve the governance of state-owned enterprises (SOEs).
“The reshuffle is likely to undermine, if not reverse, progress in SOE governance, raising the risk that SOE debt could migrate onto the government’s balance sheet,” Fitch said at the time.
Fitch said yesterday the South African government no longer forecast stabilising debt.
The National Treasury said on Wednesday that as a result of the R50.8bn revenue shortfall the Budget deficit would widen to 4.3 percent.
The Treasury said, because the deficit was expected to remain high over the medium term, gross national debt was projected to continue rising, reaching more than 60 percent of GDP by 2022.
Fitch also questioned the Treasury’s prediction that the non-interest expenditure ceiling would be breached by R4bn in the 2017/18 financial year. This was mainly because of the government’s recapitalisation of SA Airways (SAA) and the SA Post Office.
“This amount is small at 0.1 percent of GDP and the government is looking for ways to make the recapitalisation revenue neutral, so that a breach of the ceiling could still be avoided. But the fact that a breach is included in official projections points to a significant loss of credibility for this policy tool,” Fitch added.
Nedbank economist Nicky Weimar said the contents of the MTBPS had given the rating agencies enough reasons to downgrade the country’s sovereign rating. “At the moment, there does not appear to be any plan to turn things around,” said Weimar.
But she said the agencies might hold off until the ANC’s national conference in December, as the conference might give clear political guidance.
Debt ratio In a commentary on the MTBPS, Momentum Investments economist Sanisha Packirisamy and head of macroresearch and asset allocation Herman van Papendorp said that while the rating agencies might choose to remain on hold at the upcoming reviews in anticipation of the conference, “the lack of commitment to fiscal consolidation and a climbing debt ratio over the (medium-term expenditure framework) could prompt a downgrade as early as November 2017.
“Treasury admitted that although aggressive fiscal consolidation to stabilise debt ratios and narrow the Budget deficit could reduce financial risks, this approach could also weaken demand, curb investment and dissuade employment creation.
“Nonetheless, Treasury qualified its opinion by adding that taking no action could very well result in rating downgrades, pronounced capital outflows and a sell-off in the local currency.” Candid Meanwhile, speaking in Cape Town yesterday, Gigaba said he would meet the ratings agencies next week, but added that he could not predict the outcome of the meetings.
“(On Wednesday) we were announcing the bad news… opening up the books before the nation and saying we have a difficult story to tell. We were candid with the nation,” said Gigaba.
He said the MTBPS did not specify how it would make up for the R50.8bn revenue shortfall. “Are we going to raise taxes or are we going to cut more?
“We said we are working towards identifying more programmes to delay, from which we will get the money that we will use as government to cover up for some of our expenses.
“We need to come up with very concrete measures and that we can do best during the (2018) Budget.
“A Budget deficit of 4.3 percent up from the projected 3.1 percent was a shocker for everybody. We need to take drastic steps in the next few months.”
Gigaba dismissed assertions that the ANC elective conference could see key decisions delayed. “Everybody knows the economy is in crisis… We need to act right now and take the tough decisions that are going to restore confidence and boost our economy.”
Gigaba said the SOEs had to improve their governance, reduce debt and bring on board competent and efficient managers. Poor governance and the precarious state of the finance at most of the SOEs has been the government’s Achilles’ heel for a while.
Asked if, with hindsight, he would have done anything differently during his time as public enterprises minister, Gigaba said: “If I had known back then some of the things that I know now, indeed I would have done certain things differently.
“There were other things which we could have done better in terms of financial management.”