Fitch warns on fiscal changes
Gross loan debt is excessive
FITCH Ratings agency yesterday warned that Finance Minister Praving Gordhan’s fiscal adjustments in his mediumterm budget policy statement (MTBPS) would not contain South Africa’s gross loan debt while Moody’s Investors Service was more subdued.
Fitch said the substantial tightening measures worth 0.5 percent of gross domestic product (GDP) in the 2017/18 in the policy statement suggested that while fiscal consolidation remained a government priority, the measures would be insufficient to avoid a further delay in stabilising debt-to-GDP ratios given low economic growth.
The warning comes after Gordhan revised his forecasts in the MTBPS saying that the government now expected its debt to peak at 53 percent of GDP in 2018/19, 2 percent higher than forecast in the February Budget.
Debt servicing cost Gordhan said debt servicing costs were expected to climb to 11.6 percent of GDP by 2018/19, from 10.4 percent in 2015/16. Observers said this was negative for markets.
The government also revised its budget deficit forecast for the current fiscal year to 3.4 percent from the February projection of 3.2 percent. Economic growth for this year was revised down to 0.5 percent from 0.9 percent in February, and is expected to rise to 1.7 percent next year.
Moody’s said South Africa’s fiscal consolidation was largely on track, albeit at a slower pace and hampered by uncertainty over structural reforms.
“Key fiscal risks to the budget delivery and hence to South Africa’s credit quality include lower-than-projected growth, emerging wage pressures and rapidly rising contingent liabilities related to financially weakened state-owned enterprises,” Moody’s said yesterday. It also said spending pressures were also likely to rise in the run-up to the 2019 elections.
Fitch said poor economic performance remained the main impediment to debt stabilisation, but government measures to boost trend growth performance constituted fine tuning rather than meaningful reform.
Structural reform measures… will not be sufficient to raise business confidence substantially.
“Structural reform measures highlighted in the MTBPS, such as efforts to reduce legal uncertainty in the mining sector or improved visa processing, will not be sufficient to raise business confidence substantially in the near term, although progress has been made on alleviating electricity shortages, a key factor that had held back growth in recent years,” Fitch said.
Gordhan announced a R28 billion revenue raising measure to be implemented in 2017/18. However, Fitch said the measure would come at a sensitive time. “The ANC electoral conference at the end of the year will choose the presidential candidate ahead of the 2019 national election. Positioning by potential candidates, as well as concerns following the poor showing of the ANC in local elections in August, may make unpopular tax measures politically difficult and heighten pressure for additional spending.”
South Africa’s debt is due for a review in December by ratings agencies. Fitch and S&P Global Ratings have the country’s credit grading at one notch above junk, while Moody’s has it at two notches above non-investment grade.
TreasuryOne dealer Andre Botha said: “One of the main reasons for the market to not like the (MTBPS) speech was that GDP growth has been revised lower again for 2016 and 2018. GDP growth is a major factor in rating agencies’ decisions regarding a country’s credit rating and with the dismal growth in South Africa, things are not looking too good for December.”
Sanlam Investments economist Arthur Kamp said despite the National Treasury’s sterling effort in implementing fiscal consolidation, the government gross loan debt ratio continued to increase, although at a slower pace.
“The continued increase in the debt level speaks to the sustained underperformance of the South African economy,” Kamp said. “We know this is a concern to ratings agencies. Even though the agencies look to ‘see through the cycle’, they also emphasise potential growth, which in South Africa’s case is exceedingly low for an emerging market country.”