Quick fixes will hurt SA rating – Fitch

Election promises could slow economy

SOUTH Africa should avoid quick fixes to address widespread discontent ahead of the upcoming local government elections, Fitch Ratings said yesterday, warning that this could slow economic growth and affect the country’s rating.

Jan Friederich, a senior director at Fitch, said there was no question that the local elections were unusually important this year and had the potential to impact on the country’s credit ratings.

“Authorities may feel, if they have a poor showing, that there is a need for quick fixes like the introduction of a high minimum wage that would appear to help the poor, but may also discourage investment and, thereby, affect growth,” he said, speaking via video at the Nedgroup Investments 2016 Treasurer’s Conference that was held in Johannesburg yesterday.

Electoral distraction

He warned that the sustained internal leadership discussion and rivalry in South Africa might take away energy from normal policy processes and make it difficult to pass reforms on fiscal discipline if necessary.

S&P Global Ratings and Fitch deliver their decisions on the sovereign rating next week.

Fitch downgraded South Africa’s sovereign ratings to BBB- with a stable outlook.

Moody’s Investors Service affirmed South Africa’s credit rating at two levels above junk this month and S&P is to review its BBB- rating of the country’s credit.

Prospects of public finances were bleak with the ratio of debt-to-gross domestic product (GDP) increasing to 53 percent last year from 26 percent in 2009, Friederich said.

In Fitch’s last review it noted that failure to stabilise the debt-to-GDP ratio could trigger a negative rating, and although the Treasury had projected stabilisation of the debtto-GDP ratio, there were risks.

“One of the risks could be an underperformance of GDP growth, which leads to an insufficient increase in revenues.

“Another risk could be on measures, which government plans to implement but that may not bear fruit in terms of savings government hopes for.

“A third concern is the upcoming elections. Authorities will see the need to react to discontent on living standards by pushing costly social programmes,” Friederich said.

Finance Minister Pravin Gordhan has been trying to stave off a credit downgrade, with both business leaders and the government working together to try to stave off a downgrade to junk status.

This week Mike Brown, the chief executive of Nedbank, said there had been an enormous effort by the government and business. However, political manoeuvring had been very damaging as it called into question the government’s commitment to fiscal consolidation and raised questions on the ability to deliver growthenhancing reform.

Meanwhile, Moody’s is optimistic about the country’s prospects. Bloomberg cited Moody’s senior analytical advisor Aurelien Mali, who said there was a strong expectation that the spending ceiling would be respected, meaning fiscal outcome was very likely and debt should stabilise.

“There are execution risks to fiscal plans. Political noise is just noise. We base our assessment on facts and not on speculation. If some decisions are really weakening the balance sheet of the government, or really putting some of the key reforms in danger, in that case it will probably have an impact on the rating.”

Bloomberg also cited Moody’s senior analyst Zuzana Brixiova, who said the economy could be reaching “turning point” with bottlenecks to growth seen as being “not as pronounced”.

“On the fiscal position, we expect a small increase in government debt this year, but then stabilising and eventually going below 50 percent of GDP in the years after,” Brixiova said.

“This is something that we attach a lot of importance to because over the last six years” the debt-to-GDP (ratio) has more than doubled, she said.

Consolidation

Nazmeera Moola, the co-head of fixed income at Investec Asset Management, said yesterday that S&P was likely to give the government time to realise budget goals.

Moola said South Africa was “still very much on the naughty step”, but there was early evidence that pointed to the realisation of fiscal consolidation.

Minister in the Presidency Jeff Radebe said yesterday that the government was confident it had done all it could to convince ratings agencies to not downgrade the country’s credit rating to junk status.

“We have seen in the past two weeks with Moody’s – even though they gave us a negative outlook but they did not bring us down.

“As we all know, S&P and Fitch are in the country. They have already met with several cabinet colleagues and I’m sure all of us need to be very optimistic about the future of South Africa,” Radebe said. – With additional reporting by Bloomberg and ANA