Konrad Reuss

S&P Global Ratings MD for sub-Saharan Africa and SA

Your initial reaction to this budget?

From a rating agencies’ perspective, given that the fiscal targets and economic growth assumptions in the budget are very much aligned with our expectations, I would call this a very reassuring budget. Also, this budget has shown a continued firm commitment to a path of fiscal consolidation, which is important to us.

Is there anything in the budget to give you confidence that SA may be able to raise its growth rate this year beyond the 1.4% which S&P has pencilled in?

It would be wrong to expect the budget alone to be a game-changer with regards to economic growth. The moderate recovery we’ve seen this year is very much a cyclical rebound after what happened last year. It’s helped by firming commodity prices, the breaking of the drought, and the pickup in global demand. So overall there’s been a more positive external environment.

But the main point is that it’s very much a cyclical recovery — not the sustained, higher level of growth which is so important with respect to the long term. That is something this budget is short on. It mentions structural reform, but only the implementation of reform — be it in parastatals, or mining, or the labour market — can have a positive impact on sentiment and drive higher growth . . . We have expressed discomfort at the slow pace of structural reform. It would need to pick up [for us] to see sustainable faster growth.

How high is the bar to further downgrades from S&P?

With the continued negative outlook, we’re saying the risks are on the downside, and there is generally greater than a one-out-ofthree chance. Since assigning the negative outlook on the current BBB- foreign currency rating, fiscal financing needs and economic growth have not met our basecase expectations. However, we affirmed the ratings in December, notwithstanding marginal revisions to our growth forecast.

Looking ahead, if GDP growth or the fiscal trajectory does not improve in line with our current expectations (say, if SA enters a recession in 2017) then we could lower the rating. In addition, if government debt levels and contingent liabilities (related to parastatals) exceed our current expectations, ratings could be lowered. A weakening of SA’s institutions due to political interference . . . could also result in lower ratings.

In December, you noted that political tension in SA was rising, and said this could weigh on investor confidence and exchange rates and potentially affect government policy direction. Is this prediction being borne out?

In our December affirmation, we assumed that political tension and contestation will increase in the run-up to the ANC’s 2017 elective conference.

At this point, there are no signs that political tensions are diminishing. If (rising) political tensions were to undermine the economic growth and fiscal trajectory, it would be a concern.

If Pravin Gordhan were to be removed as finance minister and replaced with a less credible candidate, how would that affect SA’s sovereign rating with S&P?

Ratings are not a credit opinion on specific office holders. A sovereign rating addresses a government’s willingness and ability to service its debt . . . we have seen that political events have distracted from growthenhancing reforms while economic growth has remained a key rating’s weakness. In light of our negative outlook, disruptive events that would impact on market confidence and investment climate, threatening GDP growth or the fiscal trajectory, are a concern.

What factors support SA’s rating?

The rating is supported by SA’s status as a middle-income country and its diversified economy as well as our assumption that SA will experience continued broad political and institutional stability as well as macroeconomic continuity. This also takes into account the strength and transparency of SA’s political institutions and deep domestic financial markets.