Six months to cure South Africa’s ailing economy - Treasury says it’s on it

The National Treasury on Friday pledged to intensify plans to improve management of the economy to avert the risk of South Africa being downgraded to junk status in December.

It also promised to unblock obstacles to ensure faster employment growth in key sectors‚ but gave no details of how it planned to achieve this.

The pledges came as S& P Global Ratings (S& P) affirmed South Africa’s long and short term foreign and local currency bond ratings at ‘BBB-/A-3’ and ‘BBB+/A-2’ respectively. The foreign currency bond rating remains one notch above sub-investment grade whereas the domestic currency bond rating remains three notches above subinvestment grade.

S& P maintained the negative outlook on the rating‚ citing concerns about economic growth and warned it could lower the rating by year-end or next year if policy measures do not turn the economy around.

Alternatively‚ the Treasury said‚ S& P could revise the outlook to stable if they observe policy implementation that leads to an improved business confidence environment and increased private sector investment and ultimately result in higher levels of growth.

A downgrade to BB+‚ or junk‚ would have put SA on a par with Russia‚ Indonesia‚ Turkey and Azerbaijan‚ among others. The effect of a junk rating would have increased SA’s overseas borrowing costs for companies as well as the state‚ reduced the country’s attractiveness to foreign and domestic investors‚ and further weakened the rand.

“Government is aware that the next six months are critical and there is a need to step up the implementation of the 9-point plan and other measures to boost the economy‚” the Treasury statement said.

Government would work with business and labour to intensify efforts aimed at restoring confidence and boosting investment amongst local and international investors‚ as well as unblocking obstacles to faster employment growth in key sectors.

The Treasury also committed the three sectors to undertaking fiscal‚ State-Owned Companies (SOCs) and regulatory reforms.

“United effort towards concrete delivery in these priorities will lay a solid foundation for all South Africans to break through‚ in a sustainable manner‚ the cycle of poverty‚ inequality and unemployment‚” it asserted.

The Treasury’s next challenge comes from ratings agency Fitch‚ which also rates the country’s debt at one notch higher than junk‚ and is expected to announce its verdict on June 8.

Investment management advisor Francois Botha‚ head of multi-management at Novare‚ said government desperately needs to earn more and spend less to avert potential downgrades.

“South Africa’s economic and political climate has deteriorated significantly‚ unemployment has increased‚ interest rates have spiked‚ and business and consumer confidence is low. The result of this is that the country’s GDP growth has slowed. Slow growth implies lower government revenue‚ higher fiscal deficits‚ weak investment spending‚ sluggish infrastructure roll-out‚ and rising social and political tensions‚ all of which are naturally credit-rating negative‚” Botha said.

“To avoid a downgrade later in the year the government will have to demonstrate a commitment to decrease spending.

 “The government desperately need their income to increase.

“In order to do this the government will have to focus on measures which will grow the country‚ reduce the unemployment rate and increase the tax base.”

The problem is that South Africa is already experiencing high inflation and the Monetary Policy Committee will likely impose further interest rate hikes this year to bring inflation back within the target band‚ Botha said.

“The result of this is that it will put further pressure on economic growth.

“If we don’t find a catalyst for growth within the next few months then a downgrade would be inevitable.”

 

 

 

 

 

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