The broad reaction of Global Credit Ratings (GCR) to today’s budget speech is that it was a pragmatic approach by the Minister of Finance, Pravin Gordhan, against a backdrop of subdued economic growth, twin deficits, and a rising trend of government debt to GDP. The key question is “was it enough to prevent a further sovereign downgrade?”
In addressing the persistent budget deficits, as expected, a combination of increased taxes and cost containment has been proposed, with forecasts of a reduction in the budget deficit to 2.4% in 2019. With respect to increased revenue, the implications are that this will largely be achieved by way of increased taxation on higher income earners, higher fuel levies, new emissions, tyre, sugar and other taxes, and an increased tax rate on some smaller tax contributors, generating around R15 billion per annum. Government revenues will, however, continue to remain vulnerable to a further deterioration in economic conditions.
Containment of expenditure is crucial and the Minister alluded to the fact that vast, rapid improvements need to be made on this front, in order to ensure that spending is carefully managed. Emphasis was placed on initiatives aimed at rationalising the government wage bill, a reduction in transfers regarding the operating budgets of public entities, and streamlining procurement processes. Further, the nuclear build financial commitments appear to have been side-lined for now. Whether such aggressive cost rationalisation, amounting to R25 billion per annum and a further R15bn in 2018/19, is achievable remains to be seen, with any overspend a potential risk to the sovereign rating, given that the shortfall will have to be funded through additional debt.
Another key priority identified in today’s speech is stabilising debt as a percentage of GDP, from existing levels of around 50%, which will be heavily dependent on fiscal deficit reduction initiatives. This also needs to be assessed in conjunction with government guarantees to state owned entities, which adds to the sovereign debt burden.
The Minister also revised South Africa’s persistently weak GDP growth downwards, with expectations of 0.9% in 2016, aligning to similar forecasts from the IMF and other economists, albeit at the higher end of the general consensus. Through various proposed initiatives aimed at bolstering investor confidence and reducing corruption, the Minister is of the view that economic growth will recover in 2017 and 2018, with job creation following suit. This will be one of South Africa’s greatest challenges.
Rating agencies will digest the Minister’s comments and stringently assess the realism and ability to rapidly institute the new initiatives proposed by the Minister in his speech today, and their impact regarding key sovereign rating parameters. In due course, they will communicate their findings, and it remains to be seen whether they are of the same view as the Minister, in that sufficient measures have been taken to avert a sovereign downgrade for now.
By Marc Joffe, CEO of Global Credit Ratings