South Africa would face further ratings pressure if it experienced more fiscal deterioration and if policymakers did not take steps to improve governance and boost economic growth.
This was the warning signalled by Konrad Reuss, managing director and regional head for Africa at S&P Global Ratings, on Tuesday.
The country has been gripped by a renewed sense of optimism after the ANC recalled President Jacob Zuma, and Cyril Ramaphosa – widely perceived as a business-friendly politician – was sworn in as president. Yet, although a number of entities – including the South African Reserve Bank – have revised their economic growth expectations for the year, there is still concern about the country’s relatively low GDP growth, fiscal situation, governance and policy environment.
Reuss said there would be “upside potential” for the country’s ratings if there was much higher economic growth, fiscal problems were addressed and policy reforms implemented.
“If you don’t find these policies, if you don’t find the political support, your rating just continues to weaken,” he told delegates at the Gordon Institute of Business Science’s Economic Outlook 2018 Conference.
S&P downgraded South Africa’s local currency rating to junk in November with a stable outlook, and lowered the foreign rating – already in speculative terrain – another notch. Moody’s is the only ratings agency that still has the country’s local currency rating on investment grade and will be monitoring the budget closely for signs of fiscal slippage.
While South Africa has faced a host of challenges in recent years, including policy uncertainty, political instability and corruption at state-owned enterprises, poor economic growth has been the main contributing factor behind the slide in its credit ratings.
“In many ways, it all comes back to the weak growth performance. The fiscal problems, the problems with job creation, the income distribution issues, it all comes back to the weakness in growth in some form or shape,” Reuss said.
National Treasury is under pressure to take meaningful steps to overcome an estimated tax shortfall of R51 billion in Wednesday’s budget, and is expected to introduce tax hikes of around R30 billion as well as significant spending cuts, but runs the risk of stifling economic growth. The Medium-Term Budget Policy Statement (MTBPS) projected a consolidated budget deficit of 4.3% of GDP for the current tax year, compared to the February target of 3.1%.
In the wake of the global financial crisis, South Africa increased spending and cut taxes, but the return to a sustainable fiscal path has proved to be a lot more difficult than expected.
Reuss said this had to be seen in the context of certain policies it pursued, increased public sector employment and wages and increased social spending. Low economic growth also put pressure on the South African Revenue Service’s tax collection efforts.
A number of structural issues would make it very difficult for the new administration to put the country back on a sustainable fiscal path, he warned.
There was also concern about the trajectory of the country’s debt and rising interest burden (as a percentage of revenue). The latter rose from about 8% to 14%.
If it wasn’t for this rise, the country could have spent significantly more on social services, hospitals and education. Instead, critical funds were used to service interest payments and pay public-sector wages due to the history of fiscal policy.
While there was substantial enthusiasm about current developments, in the medium to longer term, the country had to introduce public sector reforms that dealt with public sector employment and the priorities set in the budget, Reuss said.
Gina Schoeman, economist at Citibank, had upgraded her GDP forecast for the first time in seven years, but the numbers were still relatively low at 1.5% for 2018 and a possible 2% for 2019.
The cyclical upturn expected in the short term would largely be fuelled by increased confidence, a stronger rand and lower inflation, which would support spending. However, in the wake of the budget, an expected cabinet reshuffle and the Moody’s ratings decision, the big question would be where the structural growth needed for employment would come from, she said.
Ramaphosa previously said the economic growth target for 2018 should be 3%.
Dr Azar Jammine, director and chief economist at Econometrix, said 3% was possible, but only in 2019. With regard to 2018, the die was cast, depending on budget developments.
He said the positive global environment had contributed to a remarkable risk appetite for emerging market assets, which had supported the rand. This could lead to lower inflation and possibly lower interest rates, while improved drought conditions and higher commodity prices should also support the economy.
While these measures could have led to economic growth of 3%, higher taxes and reduced government spending would neutralise the benefit of other cyclical factors in the short term, Jammine said.
“I think 3% is a tall order for this year.”
Dr Iraj Abedian, founder and chief executive at Pan-African Capital, said while the country had become “ecstatic” on the political ground, it had not yet dealt with the unwinding of a sophisticated, extractive predatory system and the economic damage it did.
However, unlike many other countries, South Africa had a unique attribute – all the remedial capabilities required were inside the country and not outside it, he said.
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