Nene’s growth dilemma the fly in ointment
| Worries over R224.9-billion SOE guarantees and revenue concerns blunt confidence in outlook
FINANCE Minister Nhlanhla Nene’s maiden budget sent all the right signals on Treasury’s resolve to contain government’s borrowing — but analysts are unconvinced, saying details are missing on how the country plans to meet its targets for cutting debt.
The main issue for financial markets and credit rating agencies is the budget deficit, which the Treasury has said will remain unchanged at 3.9% of gross domestic product (GDP) in the financial year which begins today. This is above the forecast of 3.6% it made in October when it announced its medium-term spending plans.
The deficit isn’t exactly a train smash, however, as the shortfall is supposed to narrow very sharply to 2.6% of GDP in fiscal 2016-17, and 2.5% of GDP in the following year — unchanged from previous estimates.
There is concern over whether those ambitious targets can be met, given that the slow pace of economic growth will affect tax revenues. The main threats to growth are the chronic electricity shortages and the funding needs of stateowned enterprises with shaky balance sheets.
“All the right noises were made and there is nothing in the budget to show we are veering off course. But there is not much room for manoeuvre or slippage,” said Konrad Reuss, MD of Standard & Poor’s rating agency in South Africa and southern Africa.
Taken at face value, said Reuss, the budget was “ratings neutral”.
This is important because last year S&P lowered its sovereign credit rating for SA by two notches to BBB-, just one notch above “junk” status — which would mean the country’s debt was no longer investment grade and would make it much more expensive for the government to borrow on international markets.
Fortunately, S&P now has a “stable” outlook and is unlikely to slash the rating any time soon. Its two rivals, Moody’s Investors Service and Fitch, have given South Africa a credit rating two notches above junk status. The outlook on Moody’s assessment is stable, but Fitch’s is negative.
After the budget this week, Fitch said that the R8.2-billion the Treasury plans to raise through tax increases in the coming year falls well short of its previous goal of generating R27-billion in extra revenue over the next two years.
Fitch previously highlighted weak growth and a failure to boost potential growth as a negative ratings trigger.
The budget slashed growth forecasts to 2% for this year and 2.4% next year, down from 2.5% and 2.8% respectively in October . These levels are seen as realistic, given the power shortages the country faces over the next couple of years, which will take a heavy toll on manufacturing and mining.
“Efforts at implementing the National Development Plan remain piecemeal, raising concerns about its effectiveness in boosting growth to the eventual target of 5%,” Fitch said, concluding that the outlook for public finances would form an important part of its next scheduled review of the sovereign rating on June 5.
The Treasury pledged to keep its net debt in check at 42.5%, 43.1% and 43.7% of GDP over each of the coming three financial years. But it highlighted its R224.9-billion guarantee exposure to state-owned enterprises, acknowledging that this posed a major risk in the medium term.
Financial markets were disappointed by the lack of detail on its pledge to provide ailing power utility Eskom with a R23-billion capital injection, apart from saying it would be paid in three tranches — R10-billion in June, R10-billion in December and another R3-billion early next year.
Treasury officials said revealing details would jeopardise the market value of the transactions involved. This could include “the disposal of non-strategic assets such as property, direct and indirect shareholdings in listed firms, nonstrategic shareholdings in state-owned companies and surplus cash balances in public entities”.
Treasury said real non-interest spending would rise by 2.5% in the coming year before subsiding to 0.7% the following year. It did not highlight the increase in fiscal 2017-18, which will bring the average over the three years well above its October projection of 1.3%.
“Despite signs of progress there are lots of unknowns of how they will take on further consolidation in the next two years,” said Razia Khan, Standard Chartered’s research head for Africa. “The budget … seems to be more reactive. It lacks the strategic perspective of what the next three years will look like.”
Efforts at implementing the NDP remain piecemeal