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Budget fails to clear risk of further rating downgrades

Friday, 28 February 2014   (0 Comments)
Posted by: Author: Evan Pickworth
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Author:  Evan Pickworth (BDlive)

South Africa remains vulnerable to sovereign rating downgrades, with the three major rating agencies and analysts saying on Thursday they were skeptical about the forecasts in the budget for growth and the current account deficit.

Further, they expressed concern about the potential for populist policies after the May national election.

Standard & Poor’s (S&P) and Moody’s already have negative outlooks on South Africa, while Fitch has it on stable. Further negative moves in the ratings would hit the already fragile investor appetite for South African assets such as equities, bonds and the rand.

The negative outlooks indicate there is a risk of more rating cuts after all three of the agencies downgraded South Africa between September 2012 and January last year.

S&P director for sovereign ratings Ravi Bhatia said on Thursday he was concerned about the current account deficit and its financing. One of the major outstanding questions was "where future growth would come from".

South Africa’s current account deficit, which measures by how much the value of goods and services imported exceeds those exported, is at 6.8% of gross domestic product (GDP). This makes the rand vulnerable.

Higher interest rates in this scenario would potentially weaken GDP, which slowed to just 1.9% last year from 2.5% in 2012.

The Treasury expects the fiscal deficit — the difference between state revenue and spending — to narrow to 4% in 2014-15 from a 4.1% expectation in October.

On Wednesday the Treasury forecast the economy would grow 2.7% this year, down from a previous forecast of 3%. But Kristin Lindow, senior vice-president at Moody’s, said the projection was "higher than consensus".

Finance Minister Pravin Gordhan on Thursday rejected suggestions that populist pressures had encouraged the Treasury to spend more. The fiscus was "on the straight and narrow".

 Ms Lindow said if the election results this year led to a more populist strategy, more reticence from foreign investors to participate as actively in the local government bond market could be expected. That would have negative consequences for the cost and availability of funding.

Since the start of the year, foreigners have been net sellers of R17.363bn worth of South African government bonds from purchases of R25.762bn in 2013.

Ed Parker, MD for sovereigns at Fitch, said the budget showed the government’s fiscal consolidation plans were on track, despite weaker economic growth, financial market volatility and the forthcoming national election.

But meeting budget deficit targets over the medium term would be "challenging", Mr Parker said. All would depend on a revival in growth and shrinking expenditure from 33.2% of GDP in 2013-14 to 31.9% in 2016-17.

A senior vice-president at global political and economic risk consultants Teneo, Anne Frühauf, said Mr Gordhan was unconvincing on growth. Rating agencies were watching both the fiscal picture and what was being done to bolster growth. 

"There was a lot of rhetoric around structural reform, but I didn’t see too many big, bold measures in the speech," Ms Frühauf said. "The three key risks — delays to infrastructure planning and development, higher inflation and protracted labour disputes — are in play."

Ms Frühauf said the Treasury was under pressure to balance its books going into the budget and she had expected downward revisions to growth projections for the next three years.

Mr Gordhan cut this year’s GDP growth expectations, but forecasts for 2015 and 2016 were unchanged at 3.2% and 3.5%.

Moody’s praised the government’s intention to continue with its fiscal consolidation effort.

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