This is the future: SA debt falling to junk status “just a matter of time”

History is saturated with examples of how certain economic decisions are certain to create misery. But in South Africa long-discredited dogma resurfaces often to become embraced by self-serving politicians and their acolytes. In most places on earth it is inconceivable that citizens would even consider Soviet-style policies of nationalisation, massive expansion of the public sector and continuous attacks on business. It is a basic truth that communism has failed wherever it was tried – and that it is the private sector which generates the income (taxes) to pay for the public sector. But in SA, resistance to these natural laws is so deeply ingrained into the political mindset that many believe it is impossible for the country to sober up until disaster strikes. Maybe, just maybe, the next step in the path to destitution – a downgrade to junk status of SA Government debt – will ring the alarm bells loud enough to spark corrective action. Economic illiteracy is perhaps the greatest of all South Africa’s tragedies. – Alec Hogg

By Rene Vollgraaff and Xola Potelwa

(Bloomberg) — South African Finance Minister Nhlanhla Nene side-stepped an immediate credit downgrade with his budget proposals. Still, investors are betting cuts that would bring the nation’s rating to the brink of junk are just a matter of time.


Fitch Ratings and Moody’s Investors Service, which rate the nation’s debt two steps above sub-investment, are set to bring their assessments in line with Standard & Poor’s at the lowest investment-grade level, credit default swaps suggest. Another step down would start triggering capital outflows, Nene, 56, told lawmakers on Oct. 21, when he lifted projected debt levels and widened budget-deficit targets in the face of slowing growth.

The cost of insuring South Africa’s dollar debt against default for five years has climbed 58 basis points in the past 12 months to 248, compared with the 142 median of five emerging- market economies with similar ratings at Moody’s and Fitch, and 215 for those rated one level lower.

Read also: S&P cuts Brazil credit rating to junk status. SA must brace for the same

“The debt metrics that the ratings agencies look at are probably going to put us on the back foot,” Thando Vokwana, a currency trader at FirstRand Ltd.’s Johannesburg-based Rand Merchant Bank unit, said by phone on Oct. 22. “You could see a possible downgrade coming and in that case South Africa is so reliant on external funding that it would spell disaster.”

South Africa relies on portfolio inflows to finance a current-account shortfall forecast to average 4.3 percent of gross domestic product in 2015 as demand for the nation’s commodity exports slows. Weakening tax revenue is putting pressure on the budget deficit, giving Nene less room to spur an economy close to recession and cut a 25 percent jobless rate.

Nene cut this year’s growth forecast to 1.5 percent from 2 percent and predicted expansion of 1.7 percent in 2016, down from an earlier estimate of 2.4 percent. The budget deficit will widen from earlier forecasts, reaching 3.3 percent in the fiscal year through March 2017 and 3.2 percent in the following year. Government debt will reach almost 50 percent of GDP this year, a threshold the government won’t cross, Nene said.

Fiscal Buffers

Keeping debt in check “could now prove challenging,” Kristin Lindow, a New York-based senior vice president at Moody’s, said via e-mail on Friday. The rising government wage bill has eroded fiscal buffers, raising the risk of overshooting debt targets, she said. Moody’s has a stable outlook on South Africa’s Baa2 rating, suggesting it probably won’t lower the assessment in the next 12 months.

Read also: SA bonds Junk grade beckons: Big Three ratings agency hands back SA licence

The combination of larger deficits and weaker growth will keep public debt rising as government spending continues to increase, said Fitch, which has a negative outlook on South Africa’s BBB rating, indicating that it may cut the nation’s debt when it publishes its next review in December.

S&P, which rates South Africa’s debt BBB- with a stable outlook, said the economy isn’t able to create enough jobs to reduce unemployment, feeding anti-government protests such as last week’s student demonstrations against tuition-fee increases.

“It is very clear that there is now very little room for maneuver,” Mohammed Nalla, the Johannesburg-based head of strategic research at Nedbank Group Ltd., said in a note on Oct. 23. “Any increments to future spending plans with have to be carefully considered. Unfortunately, it is still unclear whether this message has filtered through to all areas of government.”