2018 Budget to outline ‘decisive’ measures to strengthen fiscal framework: Treasury

Finance Minister Malusi Gigaba.
Finance Minister Malusi Gigaba.

The finance ministry will be bold in its budget next year and will take decisive measures to strengthen SA’s fiscal framework after S&P Global Ratings cut the country’s local currency debt to “junk” status.

“The 2018 Budget will outline decisive and specific policy measures to strengthen the fiscal framework‚” the Treasury said in a statement on Saturday.

“Restoring business and consumer confidence‚ and catalyzing inclusive growth is the top priority of government. To this end‚ government is working urgently and diligently on practical steps to provide the necessary policy certainty‚ environment conducive to investment‚ and predictability that the country so desperately needs‚” the statement read.

S&P Global Ratings cut SA’s local currency rating to subinvestment grade on Friday‚ but raised its outlook to stable from negative.

Both Moody’s and S&P have SA’s debt on the last rung of investment grade for its local currency long-term sovereign debt‚ meaning two of the three big global ratings agencies have given a junk rating to rand-denominated government bonds.

A consensus view by credit rating agencies that SA’s local currency bonds are junk could result in index tracker funds selling up to R180bn of them‚ the Reserve Bank warned recently.

The rand initially fell to R14.15 to the dollar‚ from R13.88‚ soon after the announcement but recovered to R14.10 shortly thereafter.

Weak growth

“Weak GDP growth has led to further deterioration of SA’s public finances beyond our previous expectations‚” S&P said in its ratings action on Friday‚ citing the weakening economic and fiscal trajectory.

“We think the government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes‚ but these may not be strong enough to stabilise public finances‚ and may weaken economic growth further in the near term.”

It also lowered its long-term foreign currency rating to BB with a stable outlook.

A key credit strength‚ however‚ was the country’s monetary flexibility as well as an improving external position. The ratings agency also noted that politics had overshadowed policy making‚ despite the weakening economic conditions.

Moody’s

SA received a reprieve from Moody’s on Friday‚ with the ratings agency maintaining SA’s sovereign rating at Baa3 — which equates to BBB-in S&P’s and Fitch’s nomenclature — but placing the country’s rating on review for a downgrade

“The decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that SA’s economic and fiscal challenges are more pronounced than Moody’s had previously assumed.

“Growth prospects are weaker and material budgetary revenue shortfalls have emerged alongside increased spending pressures. Altogether‚ these promise a faster and larger rise in government debt-to-GDP than previously expected‚” said Moody’s.

Eskom still a concern

S&P’s downgrade on Friday follows repeated warnings by the ratings agency that the government standing R350bn surety for state-owned power utility Eskom’s spiraling debt was unsustainable.

In its rating action on Friday‚ S&P again cited concern over the struggling utility.

“Over the next six months‚ we anticipate that appropriations may be required to shore up Eskom’s very weak financial position. Eskom already benefits from government guarantees of nearly 8% of GDP.”

When S&P cut South African foreign-denominated government bonds to BB+ from BBB-on April 3‚ it flagged Eskom as a huge concern‚ signaling that it would also cut SA’s rand-denominated bonds to junk if nothing was done about the utility whose creditworthiness S&P rates three rungs down the junk ladder at BB-.

Fitch‚ which on Thursday affirmed its BB+ with stable outlook rating it made when it downgraded SA from BBB-on April 7‚ raised similar concerns in its report.

The ratings agency warned SA’s “capacity to provide financial support to distressed state-owned enterprises may be declining”.

“Due to concerns over governance‚ many creditors of state-owned enterprises have stopped rolling over existing facilities leading to liquidity pressures‚ notably at Eskom‚ the main electricity supply and distribution company. The plan for large investments in nuclear power generation is still progressing‚ despite some legal setbacks. This could lead to a large further increase in government guarantees over the long term‚” said Fitch.

Many economists anticipated that SA was at risk of losing its remaining investment grade ratings after a lacklustre medium-term budget policy statement.

In June‚ S&P affirmed SA’s long-term foreign currency sovereign credit rating at a sub-investment grade rating of BB+‚ and retained its negative outlook on all the long term ratings and affirmed SA’s long-term local currency sovereign credit rating at an investment-grade rating of "BBB-"‚ and also retained its negative outlook. S&P placed SA’s foreign government bonds at subinvestment grade in April following President Jacob Zuma’s surprise Cabinet reshuffle.

Additional reporting by Reuters

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