Rat­ings at risk

An­a­lysts wel­come con­ser­va­tive bud­get, but warn it’s short on de­tail and out­look re­mains neg­a­tive

CityPress - - Business - JUSTIN BROWN and BIÉNNE HUIS­MAN busi­ness@city­press.co.za

South Africa’s credit rat­ing re­mains at risk of ul­ti­mately be­ing down­graded to junk sta­tus de­spite the mea­sures an­nounced by Fi­nance Min­is­ter Pravin Gord­han this week in his bud­get speech. A key con­cern ex­pressed by an­a­lysts was that the bud­get con­tained no new an­nounce­ments about boost­ing stag­nant growth, and the ac­tual de­tails of the state’s re­straint in spend­ing were ques­tioned too.

Peter At­tard Mon­talto, a Lon­don-based No­mura econ­o­mist, said Gord­han’s fis­cal stance was “highly con­ver­va­tive, as ex­pected, but still very dis­ap­point­ing”.

“There were no mi­croe­co­nomic struc­tural re­forms an­nounced or ev­i­dence of a shift in growth pol­icy ... “The mar­ket has taken this neg­a­tively,” he added. On Wed­nes­day, af­ter Gord­han de­liv­ered his spend­ing plan, the rand weak­ened by as much as 45c against the dol­lar.

“We still see, af­ter this bud­get, South Africa on the path to sub-in­vest­ment grade in the com­ing 18 months,” Mon­talto said.

How­ever, Gord­han told news agency Bloomberg that he de­liv­ered a cred­i­ble bud­get to avoid a credit rat­ing down­grade to junk and that fi­nan­cial mar­kets prob­a­bly over­re­acted by ex­pect­ing more aus­tere mea­sures.

On a pos­i­tive note, Stan­dard & Poor’s (S&P) this week al­layed fears that South Africa’s credit rat­ing was on the brink of be­ing down­graded to junk.

The fi­nan­cial ser­vices com­pany said that, based solely on the de­vel­op­ments de­scribed in the bud­get, no rat­ing ac­tions were war­ranted.

Kristin Lin­dow, a Moody’s In­vestors Ser­vice spokesper­son, raised con­cern that the spe­cific rev­enue mea­sures that would ac­com­plish the smaller deficits pre­dicted for 2017/18 and 2018/19 have not yet been iden­ti­fied.

Kon­rad Reuss, S&P man­ag­ing di­rec­tor for Africa, said de­spite “bold rev­enue tar­gets” set in the bud­get speech, South Africa’s eco­nomic out­look re­mained neg­a­tive.

Speak­ing at the Bloomberg Africa Busi­ness and Eco­nomic Sum­mit in Cape Town this week, Reuss said: “The bud­get had fairly bold rev­enue tar­gets. But what will be done to bring growth back into the South African mar­ket?

“De­spite the con­ser­va­tive bud­get, the out­look re­mains neg­a­tive for South Africa.”

Gord­han’s bud­get con­tained bad news for strug­gling South Africans.

Slow growth, which is fore­cast at below 1% this year, means South Africans are, on av­er­age, get­ting poorer.

“South Africa’s gross do­mes­tic prod­uct (GDP) growth has now fallen be­hind the rate of pop­u­la­tion in­crease, re­sult­ing in de­clin­ing per capita in­comes,” Na­tional Trea­sury said in its 2016 Bud­get Re­view.

Gord­han told re­porters there had been a “rad­i­cal shift” in the govern­ment’s key spend­ing plan – in par­tic­u­lar, the state’s bud­get deficit was fore­cast to de­cline.

He an­nounced that the bud­get deficit was fore­cast to drop to 2.4% by the 2019 fis­cal year, down from 3.9% in the 2016 fis­cal year.

How­ever, S&P said South Africa’s fis­cal dis­ci­pline re­mained vul­ner­a­ble to lower-than-ex­pected GDP growth and short­falls in rev­enues.

The re­duc­tion in the bud­get deficit is fore­cast to take place by hik­ing tax rev­enue at a faster pace over the next three years than the growth in govern­ment ex­pen­di­ture.

Over the next three years, govern­ment rev­enue is fore­cast to rise by 28.5% to R1.572 bil­lion by Fe­bru­ary 2019, while state ex­pen­di­ture is ex­pected to climb by 22.7% to R1.695 bil­lion by Fe­bru­ary 2019.

The govern­ment would raise an ex­tra R48 bil­lion in taxes over the com­ing three years by in­creas­ing the rate of tax on a num­ber of fronts, Gord­han an­nounced.

He said the tax hikes cho­sen for this bud­get were aimed at avoid­ing the sit­u­a­tion where growth was damp­ened.

Annabel Bishop, an econ­o­mist with In­vestec Bank, agreed with Gord­han’s strat­egy, say­ing the fi­nance

Pre­vi­ous bud­gets

BIL­LION RAND min­is­ter had de­liv­ered a “sound out­come”.

At the same time, govern­ment would cut its ex­pen­di­ture ceil­ing over the next three years by R25 bil­lion, mainly by cur­tail­ing per­son­nel spend­ing, Gord­han added.

Ef­fec­tive from April 1 2016, ap­point­ments for non­crit­i­cal va­cant posts would be blocked on govern­ment’s pay­roll sys­tem, pend­ing the sub­mis­sion of re­vised hu­man re­sources plans, said Na­tional Trea­sury.

As a re­sult, the cost of gen­eral pub­lic ser­vices is set to drop by 24.4% in the 2016 fis­cal year to R73.7 bil­lion.

Gord­han said the govern­ment would not be im­pos­ing “aus­ter­ity on our peo­ple”.

“There will not be any cuts in so­cial grants, and no cuts in hos­pi­tal ser­vices,” he added.

Ex­tra spend­ing had been ac­com­mo­dated through “strin­gent cost-con­tain­ment mea­sures” across all de­part­ments, Gord­han said.

On the ex­pen­di­ture front, the fastest-grow­ing item will be debt-ser­vice costs, which will rise by 38.3% – or an av­er­age of 11.4% a year – to R178.6 mil­lion by the 2019 fis­cal year.

This comes as state debt this year is fore­cast to rise be­yond R2 tril­lion.

“Debt-ser­vice costs … con­sume 12c of ev­ery rand of state rev­enue,” Na­tional Trea­sury said.

In­come

Ex­pen­di­ture

Fore­cast

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