Fitch raises red flag after Budget
Agency to review credit rating on June 5
RATINGS agency Fitch yesterday sounded the clarion call on a possible downward revision of South Africa’s credit rating following the release of Finance Minister Nhlanhla Nene’s first Budget speech.
Fitch’s attitude is in contrast to what analysts were hoping was a Budget that had done enough for the country to avoid a rating downgrade.
Fitch holds South Africa’s long-term debt rating at BBB with a negative outlook, Moody’s at Baa2 with a stable outlook and Standard and Poor’s at BBB- with a stable outlook.
Fitch said it was concerned that Nene did not flesh out enough detail in his Budget speech to be convincing on the level of debt to gross domestic product ratio, the outlook for public finances, the downward revision of economic growth and the strategy to help Eskom not only keep the lights on, but help spur economic growth.
Outlook
“The outlook for the public finances will form an important part of Fitch’s next scheduled review of South Africa’s sovereign ratings on June 5,” Fitch said in a statement.
It said the outlook and BBB rating for South Africa recognised the growth and fiscal consolidation challenges, while acknowledging the economy’s credit strengths and shock absorbing capacity through a floating exchange rate, strong banking system and financing flexibility afforded by a high share of local currency debt with long maturity.
Econometrix chief economist, Azar Jammine, warned that a downgrade of a country’s ratings makes for higher long-term interest payments.
Speaking at a Business Report and Passenger Rail Agency of South Africa sponsored review of the 2015 Budget speech, Jammine said if a credit rating fell to junk, or below investment grade, fewer foreigners would want to buy local bonds.
Citing a graph from the SA Reserve Bank last year, Jammine said long-term interest rates rose by 20 to 30 basis points for every one notch that a credit rating was revised downwards.
“That doesn’t sound like a hell of a lot, but on a R1.5 trillion debt even a 0.3 percent increase in long-term interest rates amounts to billions of rands extra that the government has to fork out,” he said.
Jammine said for this year the government intended to borrow R162 billion to finance the shortfall between revenue and expenditure, next year R117bn and the following year R122bn, which in relation to a R4 trillion economy was not regarded as too frightening.
Fitch said downward revisions to growth forecasts had become regular in recent years, reflecting among other factors, electricity shortages and divisions in the labour market.
“Efforts at implementing the National Development Plan remain piecemeal, raising concerns about its effectiveness in boosting growth to the eventual target of 5 percent,” the ratings agency said.
Jammine said ratings agencies had given South Africa the benefit of the doubt and not downgraded on the expectation that Nene would provide suffi- cient confidence.
“The reason is because the credit ratings agencies are looking at the Ministry of Finance and they say ha ha, we want to see if you are going to stick to a more disciplined fiscal stance or not.
“They gave us the benefit of the doubt in December when we thought they were going to downgrade our credit rating, and instead they kept it unchanged because they said that Nhlanhla Nene in October in his medium-term budget policy statement projected a decrease in the budget deficit,” he said.
Jammine said the credit rating was actually reasonable when compared with other countries within the Brics formation. South Africa’s rating is in line with Brazil and India, better than Russia, but behind that of China.
“It is the same as our economic growth rate. Two percent might seem appalling, but actually it is not that much worse than many other countries at present,” he said.
Chief strategist at ETM Analytics, Russell Lamberti, said he thought the Budget was quite impressive under the circumstances, as it appeased the ratings agencies and brought some stability to the fiscus.
“I think the Treasury has done enough to just take the heat off the Budget and fiscus itself from an investment perspective. I think investors are very concerned with the fiscal trajectory. I think they are going to put that to one side and, at least for a year I would say, focus on corporate earnings, the business cycle and what is going on overseas, currency movements,” he said.
The interest burden was growing, but was not of huge concern for the government because South Africa was not close to insolvency, as Greece experienced a couple of years ago.
A downgrade of a country’s ratings makes for higher long-term interest payments.