Gordhan confident SA will fend off junk status
SOUTH Africa’s government had done enough to prevent its credit rating from being downgraded to junk by S&P Global Ratings and Fitch Ratings this month, Finance Minister Pravin Gordhan said yesterday.
“I think we’ve done enough to pass the June hurdle,” Gordhan said in an interview with Bloomberg TV in Paris.
“In the next six months we have to do more, particularly in terms of implementing what we’ve decided.”
S&P and Fitch both rate South African debt one level above junk. S&P, which has a negative outlook on its BBB-assessment, is due to announce whether it will downgrade the rating tomorrow, while Fitch will announce the outcome of its review on Wednesday.
Gordhan said he had the political backing that he needed to keep the country’s investment-grade rating.
“I’m confident we have the space to get things done,” he said. “We’re sometimes a noisy democracy but we are allowed to do what we need to do.”
Moody’s Investors Service affirmed the continent’ s most industrialised economy’ s credit rating at Baa2, two levels above junk, on May 6 after putting the nation on review for a downgrade two months earlier. It kept its outlook on the assessment on negative.
The Organisation for Economic Co-operation and Development (OECD) said in its economic outlook report yesterday that the government had to improve cost effectiveness of spending and prioritise investment projects according to their social returns.
“Fiscal credibility will depend on effectively controlling spending and implementing current consolidation plans,” the organisation said. “South Africa needs bold structural reforms to boost the economy, remove bottlenecks on production capacities (electricity and skill shortages), and increase market competition in network sectors. These reforms are fundamental for growth, job creation and reduction of high unemployment rate, and would allow reform on social safety net policies in a way which stimulates economic activity and labour force participation.”
The OECD said this year would mark a third year of declining growth in South Africa. It said improvements in electricity production were only expected by the end of the year and financial markets were concerned about public debt.
“Public debt has increased steadily in recent years. Moreover, interest payments have been increasing rapidly, prompting fiscal consolidation strategies,” it said.
Should S&P and Fitch downgrade South Africa’s public debt to sub-investment grade, the country’s cost of servicing debt will rise substantially.
South Africa had a government debt to gross domestic product (GDP) ratio of 50.10 percent last year.
From a public debt stock of 26 percent of GDP in 2009, South Africa’s debt-to-GDP ratio rapidly increased by almost 70 percent to a level of 43.9 percent by 2014.
The OECD said confidence was likely to below, deterring investment and consumption.
“In 2017, growth is projected to pick up modestly. Improvements in electricity capacity will remove production bottlenecks, bring back confidence and push up investment a little. Also, sustained job creation will increase household disposable income and consumption. And improvements in external demand, in particular the assumed stabilisation of commodity prices, will lift export markets.”
The OECD said more rating agency downgrades would further lower confidence.
It said delays in electricity improvements could not be ruled out. “Further declines in commodity prices and global demand of raw materials would also drive down the economy. On the other hand, a normal rainy season would allow the agriculture sector to recover and push down food prices, and increases in global commodity prices would boost exports and growth,” the OECD said.