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MTBS fiscal policies: Can SA now avoid a downgrade?

A close call but market watchers say implementing fiscal policy plans is critical.

There is a consensus among industry players regarding the Medium-Term Budget Policy Statement (MTBS): the emboldened Finance Minister Pravin Gordhan is walking a tightrope.

Fiscal measures proposed must boost South Africa’s economy, which is growing at a glacial pace, ballooning debt and wasteful expenditure must be contained and the credibility of the National Treasury and other key institutions must be maintained. 

The world is watching and so too are the rating agencies. S&P Global Ratings, Fitch Ratings Ltd. and Moody’s Investors Service are due to review South Africa’s credit rating in the next two months.

The agencies have warned that South Africa’s weak economic growth, growing debt at state-owned enterprises and political infighting pose a downward risk.

Although S&P Global Ratings affirmed South Africa’s rating at one notch above sub-investment grade with a negative outlook in June, it warned that it could cut the country’s rating if the economy doesn’t show signs of green shoots.

On the latter, Gordhan’s showing in Parliament on Wednesday is happening at a time when he faces fraud charges that will be tested in court on November 2. 

The charges were brought by the National Prosecuting Authority relating to the early retirement of former SARS deputy commissioner Ivan Pillay, which has heightened political uncertainty in South Africa.

The government has revised its GDP growth forecast for 2016 from 0.9% in February to 0.5% in its MTBPS. Real GDP growth is expected to accelerate over the next three years, with economic growth projected to reach 2.2% in 2019.

Gordhan was clear: rating agencies will be satisfied if South Africa sticks to its path of fiscal consolidation and plans to grow the economy.

Another hot-button issue that the National Treasury has to address is the pace of fiscal consolidation.  The Treasury has projected the budget deficit for 2016/17 to be at 3.4% of GDP from the previous estimate of 3.2%.

The National Treasury has also committed to cut the expenditure ceiling by R26 billion and increase tax collection by R43 billion over next two years. South Africa’s total debt to GDP ratio is expected to reach 45.8% this year and “stabilise” at 47.9% in 2019/20.

The focus will be on measured consolidation, which includes limiting planned expenditure, prioritising capital investments on infrastructure while stabilising national debt as a share of GDP. These measures are expected accelerate growth in GDP and tax revenue.

“The MTBPS confirmed that South Africa remains on a prudent fiscal policy and management path but the missing link was economic reform and plans to lift growth,” said Lesiba Mothata, chief economist at Investment Solutions.

Nazrien Kader, Managing Partner in Africa Taxation Services at Deloitte & Touche, agreed that the MTBPS fell in line with expectations, with Gordhan trying very hard to instill investor confidence.

“Everyone wanted action and not words. I’m still unclear what that action is,” she said.  

Wayne McCurrie, the portfolio manager at Ashburton Investment says fiscal consolidation plans might help South Africa avoid a downgrade given the expected improvements in the country’s budget deficit and debt consolidation.

“We might be going through a tough time economically and politically, but our institutions are still working. We still have government debt under control and the economy should fare better given easing pressure from drought conditions, better commodity cycle and a stronger rand,” says McCurrie.

Despite the MTBPS demonstrating some fiscal slippage, with projected higher deficit and debt levels and ratios as well as lower medium term economic growth outlook, the country can still avoid a sovereign credit rating downgrade,  said Annabel Bishop, chief economist at Investec.

“It is unlikely that South Africa’s credit rating may be downgraded to sub-investment grade in December, but there may be a drop in South Africa’s S&P local currency long term sovereign rating to BBB from BBB+,” she said.

For chief economist at KPMG Lullu Krugel, it’s all about the government implementing its plans and showing the results.

“Rating agencies won’t be entirely convinced until they see the results on the table but I think might be a little too late for us. I think we have been a little bit slow on the fiscal consolidation plans,” Krugel told Moneyweb.

George Glynos, MD at ETM analytics, said the MTBPS, with “unrealistically high growth forecasts” and a failure to address the mismanagement of parastatals, under-delivered.

“Perhaps South Africa has bought a little bit of time. But we’re still sliding towards junk status and not much has been done to avert this,” he said of the potential for a ratings downgrade.  


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