FUND­ING

Rat­ings agen­cies to keep keen eye on SOE

CityPress - - Business - FIN24 busi­ness@city­press.co.za

Rat­ings agen­cies will be keep­ing a close watch on how Fi­nance Min­is­ter Pravin Gord­han will be fund­ing sta­te­owned en­ter­prises (SOEs).

This is ac­cord­ing to a pre­view on the na­tional bud­get by Craig Pheif­fer, chief in­vest­ment strate­gist for Absa stock­bro­kers and port­fo­lio man­age­ment.

Rat­ings agency Moody’s re­cently kept South Africa’s credit rat­ing two notches above sub-in­vest­ment grade with a neg­a­tive out­look at Baa2. Fitch kept the sovereign rat­ing at BBB-, but down­graded the out­look to neg­a­tive, and S&P Global also kept the rat­ing one notch above junk with a neg­a­tive out­look.

Fitch and S&P raised con­cerns about the fi­nan­cial state of SOEs.

In its com­men­tary, S&P stated that South Africa’s con­tin­gent li­a­bil­i­ties were, how­ever, lim­ited and that gov­ern­ment faced risks from non-fi­nan­cial pub­lic en­ter­prises with weak bal­ance sheets.

These may re­quire more gov­ern­ment sup­port and in­clude the likes of Eskom, na­tional roads agency San­ral and SAA.

Fitch raised con­cerns over SOEs re­main­ing a con­tin­gent li­a­bil­ity to the sovereign. Debt of the nine ma­jor SOEs amounted to R743 bil­lion, or 18.2% of GDP, at the end of March last year. Of this, R280 bil­lion was sub­ject to gov­ern­ment guar­an­tees, said Fitch.

Pheif­fer said that mar­ket watch­ers would be fo­cus­ing on an­nounce­ments in Gord­han’s bud­get that could pos­si­bly sway views by rat­ings agen­cies. These ar­eas in­clude the medium-term view of the sovereign debt level, the bud­get bal­ance and eco­nomic growth.

The widen­ing of the bud­get deficit, fis­cal slip­page or greater debt lev­els than fore­cast in the mini bud­get could also be “neg­a­tively re­ceived” by S&P and Fitch, said Pheif­fer. Their rat­ings were each one notch above junk and a neg­a­tive move could see a down­grade, he said.

The mini bud­get re­flected a “weaker fis­cal po­si­tion” than that pre­sented in Fe­bru­ary last year, and the mar­kets had al­ready been “sen­si­tised” to the slip­page, he said.

A boost in per­sonal in­come tax will most likely pre­vent fur­ther fis­cal slip­page in the midst of a slow­grow­ing econ­omy.

“Any ad­di­tional cred­i­ble growth ini­tia­tives would also be well re­ceived and, over­all, there is a sce­nario where South Africa could es­cape a rat­ings down­grade once more,” said Pheif­fer.

“One could de­bate whether or not the cur­rent rand/dol­lar ex­change rate is pric­ing in a rat­ing down­grade, but bad news from the bud­get could see a weaker rand both in the short and long term, es­pe­cially if it does lead to sub-in­vest­ment grade sta­tus,” he said.

Absa projects an ex­change rate of be­tween R13 and R14 to the dol­lar. A year-end ex­change rate closer to R14 to the dol­lar is ex­pected. Fur­ther, a weaker cur­rency would have con­se­quences for in­fla­tion, he said.

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