Budget speech not enough to save South Africa from junk

·27 Oct 2016

While finance minister Pravin Gordhan did his best to address a number of concerns that global ratings agencies have raised about South Africa’s economic position, it will not be enough to prevent a probable downgrade to junk later in the year.

This is according to global market research group, Nomura, in an assessment of the medium-term budget policy speech delivered by the minister on Wednesday.

According to Nomura, Gordhan’s budget took a ‘neutral’ stance on the country’s fiscal policy – but was stretching the pragmatism and space allowed by ratings agencies “to the max”.

The speech had both positives and negatives – with slightly wider headline and primary deficits, and debt numbers that surprised meaningfully to the upside. However, there “was nothing at all offered new on structural reforms”, Nomura said, which came as a surprise.

“What was offered was simply the line that the existing plans and programmes of government were sufficient…for a speech so watched by markets and ratings agencies, (it is strange that) this better opportunity wasn’t used for that,” it said.

“As such, the MTBPS fails our key test question, which is exactly what the ratings agencies will be asking themselves: are there any reasons in this MTBPS to revise up long run potential growth estimates from their current 2.0-2.5% level? The answer to that is no,” Nomura said.

“We think there was nothing of note here that is new to shift the ratings agencies from their existing biases.”

The group said that the probabilities of downgrades (to external debt ratings) as a result of the MTBPS is unchanged at a 40% probability for Moody’s; 60% for S&P and 80% for Fitch.

“It remains our baseline that S&P and Fitch downgrade,” it said.

Despite the negative outlook, Nomura said that there was nothing in the budget speech to warrant an earlier, off-cycle downgrade from rating agencies – however, should the political situation escalate and Gordhan gets removed, agencies would likely react immediately.