Ratings agency Moody’s said on Monday the budget statement presented by South African finance minister Malusi Gigaba last week was credit negative, while a central bank official raised concerns over economic growth.
Gigaba shocked markets on October 25 by flagging sharply weaker growth expectations, wider deficits and rising government debt.
The comments by Moody’s, which along with S&P Global is expected to review South Africa’s credit ratings next month, come after Fitch criticised Gigaba’s budget speech for shifting away from fiscal consolidation efforts.
The rand and government bonds were pummelled last week by speculation that Moody’s and S&P could downgrade the local-currency rating to sub-investment, or “junk”, grade.
“Unless the government presents a credible fiscal consolidation plan in the February 2018 budget, debt sustainability is at risk,” Moody’s analyst for South Africa Zuzana Brixiova said in a statement.
“The lack of fiscal consolidation in the budget is also a setback to already feeble business confidence and growth.”
Gigaba widened an estimate of the 2017/18 budget deficit to 4.3% of gross domestic product (GDP) and lowered this year’s growth forecast to 0.7% from 1.3%. The government had targeted 5.4% growth.
The economic gloom surrounding South Africa is compounded by allegations of corruption in state-owned companies and of influence-peddling in government that have hurt investor confidence.
The ruling African National Congress party will in December elect a successor to President Jacob Zuma as party chief, which adds to the climate of uncertainty.
The International Monetary Fund (IMF) said on Monday it welcomed the Treasury’s transparency on the state of the economy in the medium-term budget policy statement.
“The key now is to come up with articulate policies and ultimately implement policies that will make sure that you contain the debt level but more importantly … ameliorate the policy uncertainty,” IMF Africa Director Abebe Selassie told Reuters in Harare.
He added: “Growth agenda is as important as fiscal consolidation agenda.”
Daniel Mminele, a deputy governor of South Africa’s central bank, said on Monday GDP growth was unlikely to be maintained at levels achieved in the second quarter when the economy emerged from recession.
Africa’s most advanced economy grew by 2.5% in the three months to the end of June, after contracting by 0.6% in the first quarter and by 0.3% in the final quarter of 2016. But the outlook remains bleak.
“We may not be in a recession, but it is quite doubtful that the 2.5% momentum of the second quarter can be sustained,” Mminele said in a speech posted on the bank’s website.
The South African Reserve Bank (Sarb) was taking a cautious approach to further monetary policy easing, with Mminele saying risks to the inflation outlook were “too skewed to the upside”.
“The Sarb remains concerned that (inflation) expectations have become too closely anchored around the upper end of the 3-6% target band,” Mminele said.
“Not only does this raise the risk that any shock to prices will result in a durable overshoot of the target range; it also leaves South African inflation structurally higher than in most of its trading partners.”
The central bank surprised markets in September by leaving the benchmark lending rate unchanged at 6.75% following a 25 basis point cut in July. The consensus was for a 25 basis points cut.
Consumer price inflation stood at 5.1% year-on-year in September.