South Africa’s Treasury said it is committed to narrow the budget deficit, stabilise debt, and implement growth-inducing initiatives after Moody's cut late on November 6 the country’s sovereign rating by one notch to Baa2.
The rating agency cited as key drivers of the rating downgrade poor medium-term growth prospects and a potential further increase in the government debt-to-GDP ratio. South Africa’s economy has been performing well below the 5% annual expansion needed to substantially reduce unemployment and poverty mainly due to energy constraints and frequent and prolonged labour market disruptions, as well as skills shortages, administrative shortcomings and difficulties in industrial transformation. Moody’s noted also rising interest rates, a worsening investor climate and a less supportive capital market environment (South Africa is highly dependent on external capital to fund its wide current account deficit) as hinders to growth.
In the first half of 2014, South Africa’s economy expanded by 1.3% y/y as the 5-month platinum strike weighed on both mining and manufacturing output, in addition to electricity constraints and subdued global and domestic demand. Full-year GDP growth is expected at some 1.4% this year, accelerating slightly to around 2.5% next year, 2.8% in 2016 and 3.0% in 2017, according to the Treasury’s latest forecast. While Moody’s has the same projections for 2014 and 2015, it does not expect the economy to reach its long-run potential growth rate of roughly 3% until 2018 because of ongoing energy shortages and other structural constraints.
In this low-growth environment, even strict compliance with the lowered government spending ceiling and somewhat smaller fiscal deficits are unlikely to arrest the growth in debt-to-GDP ratio in the near term, Moody’s said. In his maiden medium-term budget policy statement (MTBPS) on October 22, Finance Minister Nhlanhla Nene projected the net debt-to-GDP ratio to rise from 40% in 2013/14 to 42.8% in the current fiscal year and further to 44.6% in 2015/16 before falling to 45.4% in 2016/17. According to Moody’s, the gross debt-to-GDP ratio will reach nearly 50% by 2017/18.
In addition to reiterating its commitment to “rebuilding the fiscal space”, the Treasury said it is prioritising initiatives that will boost investment, including major projects in rail, energy and ports. In the medium term, it vowed to focus on accelerating structural changes whose impact will support economic growth.
It should be noted that Moody’s acknowledged policymakers' commitment to reining in government debt growth over the medium term and the broad political support for a macroeconomic strategy, including the National Development Plan (NDP), tighter monetary policy and fiscal restraint, which should help stabilise the debt burden over the medium term. This was the agency’s reason of assigning a stable outlook to the sovereign rating.
Even after the downgrade, Moody’s is more optimistic about South Africa’s credit strengths than its two major rivals. Moody’s now rates South Africa two notches above junk, which is the same as Fitch’s BBB, but Fitch has a negative outlook on the ratings. S&P rates Africa’s most developed economy at BBB-, just one notch above junk, with a stable outlook.
Both Fitch and S&P have welcomed Nene’s commitment to fiscal consolidation, but warned that the implementation of tighter fiscal policy will be challenging. S&P said that the ability of the government to implement the announced measures will have a strong bearing on its future rating decisions.
Fitch frowned at the government’s projections for rising public debt and said that the analysis of the MTBPS and the outlook for the public finances will form an important part of its next review of South Africa's sovereign ratings on December 12.
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