S&P upbeat on SA’s prospects

HIGHER EXPECTATIONS: EXPECTS 2% GROWTH IN 2018

Ratings agency is revising its domestic economic growth forecasts upwards.

Political transition doesn’t necessarily mean its credit rating will change on May 25.

S&P Global Ratings seems upbeat on South Africa’s outlook, revising its domestic economic growth forecasts upwards due to government’s measures to return to fiscal consolidation.

The agency, which has placed the local-currency rating on sub-investment grade or junk, expects economic growth to accelerate 2% in 2018 and 2.1% in 2019. Growth has been below 2% since 2014. Speaking at the S&P Global Annual Credit Seminar yesterday, S&P associate director Gardner Rusike, said growth in SA has been stunted by infighting within the ANC, which affected government’s work, policy implementation and political uncertainty.”

A key driver in S&P revising its economic growth forecast is an improved 2018-19 national budget, compared with October’s mid-term budget, which it called a “bad scenario”. S&P’s view is that government finances are in a much better place now. At the time, former finance minister Malusi Gigaba revealed a revenue shortfall of R50.8 billion and public debt that would exceed 60% of GDP by 2022. The hole in SA’s finances would require government to cut spending by a further R25 billion over the next three years.

The focus of the 201819 national budget was to stabilise government debt and to reduce the budget deficit over the next three years. Facing declining tax revenue, rising social demands on the fiscus and ballooning government debt, Treasury increased VAT to 15% from 14%. The consolidated budget deficit is projected to narrow from 4.3% of GDP in 2017-18 to 3.5% in 2020-21, while government debt is projected to be 53.3% of GDP in 2017-18‚ rising to 56% in 2020-21.

Rusike said SA was on a good path, as projected deficits were lower and would provide debt stabilisation. S&P’s views were also swayed by the change in political leadership, which appears to have halted the erosion of SA’s institutions, renewed reforms to restore governance at state-owned enterprises and purged state capture-linked government officials.

But this doesn’t necessarily mean S&P will adjust its credit rating on SA’s local and foreign currency rating. In November, S&P Global joined Fitch Ratings in cutting SA’s local-currency rating from BBB- to BB+ (sub-investment grade or junk). S&P’s next credit rating update is on May 25. Rusike said lifting SA’s local-currency rating from junk would hinge on the Reserve Bank’s independence and government sticking to reforms.

Government must stick to reforms