SA’s plans to curb debt: Rat­ings agen­cies give us ben­e­fit of the doubt

Fur­ther credit rat­ing down­grades are un­likely ahead of the Trea­sury’s Fe­bru­ary bud­get, when it will be more clear if eco­nomic re­vival strate­gies will work.

Finweek English Edition - - Contents - By Mariam Isa ed­i­to­rial@fin­week.co.za Mariam Isa is a free­lance jour­nal­ist who came to SA in 2000 as chief fi­nan­cial cor­re­spon­dent for Reuters news agency af­ter work­ing in the Mid­dle East, the UK and Swe­den, cov­er­ing top­ics rang­ing from war to oil, as wel

south Africa’s fi­nan­cial mar­kets may have wob­bled in re­sponse to the bad news in Trea­sury’s medium-term bud­get pol­icy state­ment (MTBPS) last month, but South Africans run the risk once again of see­ing their glass as half empty rather than half full. The fact is that for the next few months the coun­try will avoid a down­grade from Moody’s In­vestors Ser­vice — the only agency to still have an in­vest­ment-grade credit rat­ing for SA — de­spite sig­nif­i­cant de­te­ri­o­ra­tion in of­fi­cial fore­casts for bud­get deficits and debt ra­tios, both to con­cern­ing lev­els.

Moody’s took the bad news in its stride, say­ing in an is­suers note a few days later that al­though the MTBPS was “a credit neg­a­tive”, the risks to Trea­sury’s lat­est fis­cal pro­jec­tions were “bal­anced” and its tax col­lec­tion as­sump­tions were achiev­able.

This means that un­less there are un­ex­pected po­lit­i­cal or eco­nomic shocks, Moody’s is on track to keep its sov­er­eign rat­ing for SA — to­gether with a sta­ble out­look — un­changed un­til the coun­try’s 2019 bud­get in Fe­bru­ary, when it will be clear whether Trea­sury has man­aged to meet, and per­haps even ex­ceed, its lat­est tar­gets.

It also means that un­til then, the coun­try will avoid the down­grade which would knock its gov­ern­ment bonds out of the Cit­i­group World Bond In­dex, trig­ger­ing dam­ag­ing out­flows of the for­eign cap­i­tal in­vested in do­mes­tic bonds and eq­ui­ties and putting fur­ther pres­sure on the de­pre­ci­at­ing rand.

By the same to­ken, Stan­dard & Poor’s an­a­lyst for SA, Ravi Bha­tia, was fairly san­guine when he spoke at a con­fer­ence in Jo­han­nes­burg on 30 Oc­to­ber, point­ing out that al­though eco­nomic growth fore­casts had been re­vised sharply down for this year and next, the ex­pected longer-term tra­jec­tory was es­sen­tially un­changed.

He did not dwell heav­ily on the un­ex­pect­edly big ad­just­ments to Trea­sury’s out­line of higher bud­get deficits and in­creased debt is­suance, or on its plans to shift to more short-term bor­row­ing to cover ris­ing debt costs — say­ing only that Trea­sury’s debt man­age­ment strat­egy has al­ways been “cred­i­ble”.

Al­though he was care­ful not to give clues ahead of S&P’s next sched­uled rat­ing up­date on SA on 23 Novem­ber, his re­marks can be seen as a sign that the rat­ing agency is likely to keep its BB rat­ing on the coun­try — which is the low­est given by all of the top three rat­ing agen­cies — un­changed un­til the Fe­bru­ary bud­get.

Fitch, which has SA’s sov­er­eign rat­ing a notch be­low Moody’s at BB+, was more crit­i­cal in its re­sponse to the MTBPS. But Fitch also sig­nalled that it was likely to stand pat for now, while keep­ing a close watch on the “evo­lu­tion of fis­cal pol­icy” in re­sponse to the re­ces­sion, as well as po­lit­i­cal and so­cial pres­sures ahead of next year’s gen­eral elec­tion. Many an­a­lysts have been cau­tiously up­beat on the MTBPS, high­light­ing the fact that it man­aged to avoid rais­ing spend­ing ceil­ings de­spite the large rev­enue short­falls pro­jected for the next few years, as well as an un­ex­pected R30bn over­shoot in the ex­pected pub­lic sec­tor wage bill, which gob­bles up more than a third of the bud­get.

The main rea­son for this year’s rev­enue short­fall was the fact that the South African Rev­enue Ser­vice, which was badly mis­man­aged un­der for­mer Pres­i­dent Ja­cob Zuma, is go­ing to re­fund com­pa­nies R20bn of value added tax — a step seen by many as a boost to the econ­omy which is also likely to help re­store busi­ness con­fi­dence.

At the same time, rather than set­ting aside more money for wages in the bloated pub­lic sec­tor, Trea­sury shifted that bur­den to na­tional and provin­cial de­part­ments, say­ing they had to ab­sorb the costs of the pay in­creases within their own base­lines.

Doubt has been cast over whether the strat­egy will suc­ceed, but gov­ern­ment has since said it will de­velop a renu­mer­a­tion strat­egy to help those de­part­ments foot the bill. That should help avert cuts in ser­vice and cap­i­tal spend­ing which would have amounted to a form of con­cealed fis­cal aus­ter­ity — a step Trea­sury has said it will not take to avoid hurt­ing the econ­omy.

Trea­sury of­fi­cials have also made clear that new tax in­creases will be avoided, al­though the main bud­get doc­u­ment con­tained a warn­ing that fuel levies would have to rise sharply over the next few years to cover li­a­bil­i­ties in the Road Ac­ci­dent Fund.

Pres­i­dent Cyril Ramaphosa’s eco­nomic stim­u­lus plan, funded by shift­ing R32.4bn of pub­lic spend­ing, has not been seen as much of a boost for the econ­omy — in fact, Bha­tia de­scribed it as a “fis­cally neu­tral” oxy­moron.

How­ever, the in­vest­ment which SA looks set to re­ceive over the com­ing months is much more en­cour­ag­ing for the growth out­look, with $20bn pledged at last month’s in­vest­ment sum­mit and $35bn be­fore­hand, in­clud­ing $10bn each from Saudi Ara­bia and the UAE. Last, but cer­tainly not least, the coun­try’s new and out­spo­ken fi­nance min­is­ter, Tito Mboweni, wields far more po­lit­i­cal clout than his pre­de­ces­sor Nh­lanhla Nene, and will do his best to make the ANC toe the fis­cal line. The day af­ter the MTBPS was un­veiled, he warned Par­lia­ment’s fi­nance com­mit­tee that if gov­ern­ment bor­row­ing was not curbed fast, the coun­try would have to ap­proach the In­ter­na­tional Monetary Fund for a loan — some­thing which would only be ex­tended with painful con­di­tions. ■

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