Ratings agency sends warning to South Africa
S&P Global Ratings has warned that South Africa’s 2021 budget did not focus enough on economic reforms, Reuters reported.
This will make a sustained rebound in its gross domestic product unlikely, analysts from the ratings agency said in a webinar on Tuesday (9 March).
“There’s been some new momentum on pushing structural reforms but it’s still reasonably thin, and again the budget was more a sort of fiscal control exercise rather than a structural reform exercise,” said S&P analyst Ravi Bhatia.
“So there is no reason to really expect a big, sustained rebound in the growth trajectory going forward. So that is concerning.”
S&P is the latest of the three major rating agencies to comment on South Africa’s budget, with all three highlighting concerns with the government’s ability to consolidate and implement its proposed reforms.
In November 2020, Moody’s cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative.
In the same month, ratings agency Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.
Moody’s
Moody’s Investors Service said that slightly lower deficits won’t prevent debt rising in the country, as downside risks remain elevated.
In its 24 February budget, Treasury slightly lowered its deficit forecasts in response to higher revenue than expected in October and a milder 2020 GDP contraction.
“However, these adjustments are modest and will not prevent government debt burden rising over the next three years. Moreover, uncertainty over the pace of the economic recovery and the capacity of the government to limit spending – especially interest payments and support to state-owned enterprises – remains elevated,” said Lucie Villa, senior credit officer at Moody’s.
For the financial year ending March 2021 (FY2020), the government now expects to record a consolidated budget deficit of 14% of GDP, compared to its October forecast of 15.7%.
A less severe fall in revenue of 11% from 16% forecast in October is the main driver, although this still implies a year-on-year revenue loss of about two percentage points of GDP.
The unexpected rebound in value-added tax (VAT) receipts since the fourth quarter of 2020 and higher-than-anticipated corporate tax receipts were largely responsible for this revenue out performance, said Villa.
Moody’s said that while it has revised down its deficit forecasts following the release of FY2020 estimates, “we continue to expect a slower pace of fiscal consolidation and wider deficits than the government based on our expectations of higher primary spending – especially wages – and interest spending”.
It said that the revisions slow the pace of debt accumulation compared to its previous projections, but it still expects the government’s debt burden will rise to reach 100% of GDP by FY 2024.
“Moreover, risks remain elevated that the government’s debt burden and affordability deteriorate significantly more rapidly than our baseline,” said Villa.
Fitch
Moody’s comments dovetail those of Fitch Ratings, which noted that severe challenges to the government’s ability to implement consolidation persist.
“Government debt will continue to rise in the medium term, posing downside risks that are reflected in the Negative Outlook on the sovereign’s ‘BB-’ rating,” it said.
The government, it said, plans to cut non-interest expenditure by around 2% of GDP relative to pre-pandemic levels, half of which will come from lower payroll spending. “We continue to believe that cuts of this scale will be difficult to achieve and maintain more conservative assumptions than the government about the pace of fiscal consolidation,” said Fitch.
Curbing wage growth remains core to the government’s medium-term fiscal consolidation plan, but will be politically challenging, Fitch advised. The smaller-than-expected fiscal deficit in FY20/21 may give unions leverage to pressure the government to soften its position on wages.
The ratings agency said that the political calendar will also weaken the government’s negotiating position.
“Local elections are due later in 2021 and tensions with its union allies could undermine the ruling ANC party’s performance at the polls. Ongoing conflicts within the ANC, notably over governance issues, are now at a crucial juncture and could also hamper the government’s negotiating position,” it said.
Fourth quarter growth
StatsSA data out Tuesday, showed that the South African economy rebounded further in the final quarter of last year, with Gross Domestic Product (GDP) expanding 6.3% quarter-on-quarter (seasonally adjusted annualised).
Third quarter growth was also revised higher, from 66.1% to 67.3% quarter-on-quarter (seasonally adjusted annualised), signalling a stronger post-Covid bounce than initially estimated, noted Reza Hendrickse, portfolio manager at PPS Investments.
For the full year, the local economy contracted 7%. “Although last year was the worst in decades, growth has in fact surprised positively, with initial forecasts having predicted an even deeper recession,” Hendrickse said.
“Looking ahead, we expect the SA economy to continue on the path of gradual internal repair, while also benefitting from the tailwind of accelerating global growth this year. Although longer term we still consider the economy to be a structurally low growth one, there is some potential for a positive near-term surprise, given how low expectations currently are.
“Confidence should continue to rebound, particularly as the vaccine rolls out, while the strong performance of the mining sector should trickle through to other parts of the economy, as related sectors benefit. It will take some time for the local economy to get back to pre-Covid-19 levels, and load shedding will probably continue to hamper growth in the near term, but any growth ahead of expectations will be well-received, and will also make the job of National Treasury easier, as they work to maintain debt sustainability,” Hendrickse said.
Read: South Africa’s GDP per capita has shrunk to levels last seen in 2005
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