S&P: Budget 2016 aimed at wrong target. Downgrade to junk is still likely.

South Africa’s crusade against losing its investment grade credit rating just got harder. When I spoke to him a couple hours after Wednesday’s Budget speech, Nomura’s Peter Attard Montalto suggested that Treasury had been aiming at the wrong target. While he applauded the fiscal consolidation, London’s top analyst on SA opined that the real issue bothering ratings agencies is the lack of economic growth. And that, they believe, stems from structural issues that need urgent reform – but ones the ruling political party will not or cannot address. Montalto was looking for a Rubicon moment, expecting the unfireable Finance Minister Pravin Gordhan to “pull a rabbit out the hat”. He didn’t. So the ratings agencies, led by S&P, remain on course for a downgrade to junk, probably at the end of the 2016. It says much about the drift of the past seven years that many inside South Africa believe Gordhan pushed the envelope beyond expectations and are sceptical that he can deliver on promises that, clearly, are not enough to move the ratings needle. – Alec Hogg

By Matthew le Cordeur

Cape Town – South Africa’s fiscal budget for 2016 lacks significant policy announcements that will spur GDP growth, or provide enough business confidence, rating agency Standard & Poor’s (S&P) said on Thursday.

It said in a statement that its negative outlook of South Africa was not “immediately affected by the National Treasury’s 2016 budget” and that “no rating actions are currently warranted”.


S&P’s rating of South Africa is the most negative out of the three rating agencies, which includes Moody’s and Fitch.

South Africans were hoping Finance Minister Pravin Gordhan’s budget speech would convince the rating agencies that the country could pull itself out of its economic rut.

Moody’s reacted immediately on Wednesday, saying it was concerned that the specific revenue measures that will accomplish the smaller deficits predicted for 2017/18 and 2018/19 have not yet been identified.

“Only a rating committee may determine a rating action and, as these developments (listed below) were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee,” S&P said in a statement.

The rand was trading 0.78% stronger to the dollar on Thursday at R15.54.

In December, before Nhlanhla Nene was fired as finance minister, S&P kept the long- and short-term foreign currency sovereign credit ratings on South Africa at BBB-/A-3 and BBB+/A-2 for the long- and short-term local currency ratings.

S&P said Treasury’s budget projections are consistent with its assumptions of planned fiscal consolidation, albeit against a sharp downward revision of GDP growth in 2016.

“The negative outlook reflects our view that GDP growth might be lower than we currently expect; for instance, due to persistent electricity shortages, continued weak business confidence, or labour disputes escalating again,” it said in December.

Treasury confirmed this outlook in its budget review on Wednesday, saying GDP growth is estimated to be 0.9% in 2016, 1.7% in 2017 and 2.4% in 2018. “This is considerably lower than last year’s estimates,” it said.

Updating its view on Thursday, S&P said GDP growth rates are still subdued, and will likely remain so in the medium term, posing a threat to consolidation plans.

Read also: #Budget2016 – IRR’s sobering reality. FinMin undershot, stagflation likely outcome.

“The announced budget lacks significant policy announcements that we think would immediately spur GDP growth, or provide much-needed business confidence to the private sector,” it said.

It warned that labour relations had the potential to further stagnate GDP growth this year in the mining sector.

“We consider South Africa’s fiscal consolidation remains vulnerable to lower-than-expected GDP growth and shortfalls in revenues,” it said.

Moody’s also said Treasury’s revised growth forecasts of 0.9% and 1.7% are still slightly more optimistic than its own predictions of 0.5% for 2016 and 1.5% for 2017.

S&P said it noted that the budget’s ambitious fiscal consolidation targets for 2017-2018 and 2018-2019, which aim to reduce fiscal deficits at a faster pace than the Treasury previously anticipated.

Read also: Pravin Gordhan’s key #Budget2016 messages

It believes the fiscal trajectory will be exposed to contingent liabilities resulting from state-owned entities with weak balance sheets, which may require more support than what the government has currently provided.

“Debt-servicing costs are vulnerable to the domestic interest rate environment and to a lesser extent to exchange rate weakness,” it said.

Mark Joffe, CEO of Global Credit Ratings, said the budget speech showed a pragmatic approach by Gordhan against a backdrop of subdued economic growth, twin deficits and a rising trend of government debt to gross domestic product. – Fin24

Source: http://www.fin24.com/Budget/budget-fails-to-stir-sas-gloomiest-rating-agency-20160225

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