Budget does not prompt rating move, says S&P

Rating Agency Standard & Poor’s (S&P) offered on Thursday a temporary reprieve, saying the country faced no immediate action after Wednesday’s budget.

"The budget lacks significant policy announcements that we think would immediately spur GDP (gross domestic product) growth, or provide much-needed business confidence to the private sector," the agency said. But it was not material to the rating, it said.

"Efforts in this regard continue to remain limited, particularly in labour relations, where strikes have in the past inhibited higher GDP growth and have the potential to do so this year again in the mining sector," the agency said.

S&P rates SA’s sovereign credit rating at BBB-with a negative outlook. This rating is just one level above speculative grade. Downgrades raise borrowing costs.

Finance Minister Pravin Gordhan announced tax increases, job freezes in the public sector and a reduction in spending ceilings from the 2017/18 fiscal year in his budget. These are aimed at bringing down the costly budget deficit.

"Debt-servicing costs are vulnerable to the domestic interest rate environment and, to a lesser extent, to exchange rate weakness," the agency cautioned.

Subdued economic growth would likely continue in the medium term and posed a threat to fiscal consolidation plans, S&P said. The Treasury has revised its growth outlook for this year to 0.9% from 1.7%.

S&P said the Treasury’s budget projections were broadly consistent with its own assumptions of planned fiscal consolidation.

Moody’s senior vice-president Kristin Lindow did not say outright on Wednesday what the budget meant for SA’s rating, but said specific measures that would reduce deficits for the next two financial years had not been identified. Fitch Ratings has a stable outlook on its assessment, which is the same as S&P. The two agencies are due to publish reviews of their ratings in June and December. Moody’s rates the nation’s debt two levels above junk, with a negative outlook.

Mr Gordhan said on Thursday SA had delivered a credible budget to avoid a credit-rating downgrade to junk and financial markets had probably overreacted by expecting more austere measures. On Wednesday, he told Bloomberg: "We need to demonstrate it to ourselves as South Africans that we can put a package together, both in terms of our plans and financing those plans, that are credible, that are sustainable and that are viable. I think we’ve managed to do that."

He was under pressure to deliver a budget that would preserve the nation’s investment-grade credit rating in the face of slowing economic growth and rising debt. He pledged to bring the fiscal deficit down to 2.4% of GDP over the next three years by curbing the public service and raising taxes. That did not go far enough for some investors who were expecting more significant tax increases and state asset sales to boost revenue. "The key problem of SA is long-standing, slow growth experience," Moritz Kraemer, chief ratings officer for S&P, said on Thursday. "Without the growth, it is very hard to consolidate public financing."

Mr Gordhan forecast the budget shortfall will narrow from an estimated 3.9% of GDP this year, based on the view that economic growth will more than double from a projected 0.9% this year to 2.4% in 2018.

The rand slid the most of all major currencies against the dollar on Wednesday, plunging as much as 3.5% versus the US currency, while bond yields jumped. The currency was 1% lower at R15.7572 against the dollar on Thursday afternoon. Market reaction to the budget could improve after investors took time to consider the numbers, Mr Gordhan said. "The budget is not something that you can instantly react to. It requires some study to understand the different elements in the proposition we are putting forward. If there’s more relaxed observations about the budget, there will be, hopefully, a better response."

With Bloomberg