While analysts are still digesting whether finance minister Malusi Gigaba’s 2018 budget speech will ultimately be seen as a net positive or negative for the country,\u00a0it is likely to be enough to avoid a junk status credit downgrade.<\/p>\n
“While the possibility of a credit ratings downgrade still exists – since the Mid Term Budget Speech in October 2017 – it appears as if the projected fiscal position has improved. For instance, the projected debt to GDP is an improvement on the projections made in the Mid Term Budget Speech,” said\u00a0Kwaku Koranteng, acting head of Absa Asset Consulting.<\/p>\n
“In addition to that, given recent political developments in the country, as well as the attempts to improve and stabilize the State Owned Enterprises, the direction of the events of the last 3 months, including today\u2019s budget speech, will help in avoiding another downgrade,” he said.<\/p>\n
However, Gigaba will still need to walk a fine line going forward, as ratings agencies will be actively watching how well the country is able to stick to his budget, said\u00a0Jacques du Toit, senior property economist at Absa Home Loans.<\/p>\n
“One will need to see how ratings agencies will respond to the budget,” said du Toit.<\/p>\n
“They will be very cautious because state finances are still very much under pressure even after the Finance Ministers\u2019 announcements. If one looks at the Minister\u2019s speech, there is a fine balance between higher tax revenues, and economic performance, which means more money is being taken out of the consumers\u2019 pockets.”<\/p>\n
Ratings firm Moody\u2019s is currently the only one of the \u2018big three\u2019 ratings agencies to hold South Africa above junk status<\/p>\n
It had previously put South Africa\u2019s credit status on review, delaying the process to the end of February 2018, after the budget speech.<\/p>\n
In late November, the ratings firm said that South Africa\u2019s fiscal problems were a lot worse than it anticipated, though the country\u00a0retained a number of features that support its current Baa3 (one notch above junk) rating.<\/p>\n
It said that it would likely downgrade South Africa to junk if it concluded, after the review period, that South Africa\u2019s economic, institutional and fiscal strength will continue to weaken.<\/p>\n
\u201cA downgrade would likely result were the rating agency to conclude that measures to address funding gaps over the next two years lacked credibility or that the lack of progress with structural reforms effort would result in an environment not conducive to investment and growth,\u201d it said.<\/p>\n
\u201cLack of structural reforms would also send a negative signal regarding the strength of South Africa\u2019s institutions, in particular about government effectiveness in enacting sound policies. Relatedly, any developments which cast further doubt over the independence and credibility of core institutions including the National Treasury and the Reserve Bank would be strongly credit negative.\u201d<\/p>\n