How to avoid a ratings downgrade in South Africa

Moody’s has announced a move to place South Africa on review for a possible downgrade.

The ratings agency will visit South Africa in the next week to make a decision on whether to downgrade its credit status to just one notch above sub-investment grade.

It would join Standard & Poor’s (S&P), and Fitch Group in their current assessment of the country, which is one notch above junk.

David Maynier, DA shadow minister of finance, said that the ratings agencies are monitoring several ‘risk factors’ for South Africa, including weak economic growth, fiscal consolidation and state-owned enterprises.

Credit rating history 1994-2015
Credit rating history 1994-2015

Economic Growth

The DA noted that the National Development Plan envisages economic growth rates at an average of 5.4% per year every year between 2010 and 2030.

“However, this now seems impossible with economic growth rates being revised down: from 1.5% to 0.9% by the South African Reserve Bank; from 1.3% to 0.7% by the International Monetary Fund; and from 1.4% to 0.8% by the World Bank for 2016,” Maynier said.

The shadow minister noted that spending on infrastructure is below 10% of the GDP guideline; and spending on infrastructure as a percentage of GDP actually declines between 2016/17 and 2018/19, according to the latest budget.

“The biggest binding constraints holding the economy back include: a shortage of electricity, an inflexible labour market and a skills mismatch,” the DA said.

Maynier sympathized with current minister of finance, Pravin Gordhan – “there is very little he can do when it comes to economic growth given that the structural reform needed would require fundamental changes to economic policy,” he said.

“And fundamental changes to economic policy are beyond the control of the minister,” Maynier said.

Fiscal Consolidation

The DA said that the decision to fire the former minister of finance, Nhlanhla Nene, shattered confidence in the commitment and in the ability of government to hold the fiscal line and maintain the expenditure ceiling.

It said that to avoid a ratings downgrade the minister needed to show that, using a combination of revenue raising measures and expenditure cuts, he was committed to fiscal consolidation by:

  • Reducing the consolidated budget deficit to at least 3% of GDP in 2016/17;
  • Maintaining a consolidated budget deficit below 3% of GDP between 2016/17 and 2018/19;
  • Maintaining the debt-to-GDP ratio below 50% in 2016/17; and
  • Maintaining the debt-to-GDP ratio below 50% between 2016/17 and 2018/19.

South Africa’s reality:

  • The consolidated budget deficit is projected to be 3.2% of GDP in 2016/17
  • Tapering down to 2.4% of GDP in 2018/19; and
  • The debt-to-GDP ratio is projected to be 50.9% of GDP in 2016/17, tapering down to 50.5% of GDP in 2018/19.

Gross loan debt is expected to rise from R2.23 trillion, or 50.9% of GDP, in 2016/17 to R2.6 trillion, or 50.5% of GDP, in 2018/19.

The DA pointed out that debt service costs is now the fastest-growing expenditure item in the budget and is projected to reach R147.7 billion in 2016/17, R161.9 billion in 2017/18 and R178.6 billion by 2018/19.

The political party called for ‘real spending cuts’, rather than cost containment measures.

“We need a comprehensive spending review aimed at identifying savings and eliminating wasteful expenditure in all three spheres of government in South Africa,” it said.

State Owned Enterprises

Gordhan announced that the findings of the Presidential Review Committee on State Owned Enterprises would be implemented; that there would be mergers, board strengthening and private equity partners at South African Airways; and that a payment, in the amount of R5 billion, would be withheld from Eskom.

The DA stated that findings of the Presidential Review Committee on State Owned Enterprises were announced in 2013 already.

“And there is doubt whether the findings of the Presidential Review Committee on State Owned Enterprises will ever be implemented,” Maynier said.

“And so it seems that the politics trumped the economics and a ratings downgrade to ‘junk status’ is now likely in South Africa.”

He said that to avoid a ratings downgrade to junk status government will have to take the hard decisions necessary, and implement them.

The hard decisions necessary to avoid “junk status” includes at least:

  • A new private sector-led economic growth strategy;
  • Tighter fiscal consolidation, including deeper spending cuts; and
  • The privatisation, or partial privatisation, of state-owned enterprises.

More on ratings in SA

South Africa a step closer to junk in March

Junk status still likely for South Africa: ratings agency

What junk status means for South Africa

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How to avoid a ratings downgrade in South Africa