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Govt committed to maintaining fiscal sustainability – Treasury

Govt committed to maintaining fiscal sustainability – Treasury

Photo by Reuters

13th June 2014

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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Government would remain committed to maintaining fiscal sustainability and keeping its debt within manageable levels, the National Treasury stressed on Friday following ratings agency Fitch’s revision of South Africa’s outlook from stable to negative.

“Indeed, fiscal stability has been the hallmark of South Africa and will remain so. We are committed to the fiscal path and expenditure ceiling.

“While short-term cyclical factors might cause marginal deviations from targets, we will not deviate from the long-term trajectory. All necessary adjustments will be made to achieve the fiscal path,” it stated.

In a move largely expected by economists, Fitch revised the country’s outlook from stable to negative and affirmed its long-term foreign and local currency issuer default ratings at BBB and BBB+ respectively.

According to the agency, a downgrade to its expectations for domestic growth – which it now pegs at 1.7% for 2014 and 3% for 2015 – was largely owing to the five-month strike in the platinum sector, electricity supply constraints and weak domestic demand.

Fitch also noted the strong need for “structural reforms” in the economy, highlighting that an acceleration of the implementation of the country’s National Development Plan (NDP) was needed.

The agency was further worried about some of the appointments made in the country’s new Cabinet, stating that “the track record of some key ministerial appointments and shortcomings in administrative capacity mean this is subject to downside risks”.

Regarding the risks to the fiscus, Fitch expected some “moderate slippage” in the government’s consolidated budget deficit to 4.2% in the current financial year from an estimated 4% in 2013/14 owing to the growth shock and the strike in the platinum sector.

“Reducing the deficit to below 3% of gross domestic product (GDP) by 2016/17 will be challenging and dependent on a recovery in growth and adherence to tough expenditure ceilings,” it noted.

Fitch estimated that general government debt had increased to 48% of GDP at end-2013, from 27% in 2008.

“We project it will peak at around 50% in 2016. National (central) government debt was 46% of GDP at end-2013,” the agency pointed out.

Further, Fitch remained of the view that the country’s current account imbalance of 5.8% remained “uncomfortable”, noting that “the deficit leaves the country exposed to shifts in global liquidity and risk appetite.”

For South Africa to move back into the stable outlook territory, the agency said there would have to be a “significant” reduction in the budget and current account deficits, as well as an improvement in the medium-term growth prospects through the successful implementation of structural reforms in the NDP.

Factors that could prompt a downgrade to its rating later this year included a “material slippage against government fiscal projections” and a failure to narrow the current account deficit.

Commenting on the announcement, BNP Paribas economist Jeffrey Schultz described the downgrade as “unsurprising”.

“Indeed the fact that the rand seems to have largely shrugged this off this morning, suggests that the market had also fully priced this in,” he noted on Friday.

National Treasury, meanwhile, responded that government was “alive” to the growth challenges facing the country, adding that it had, therefore, prioritised the accelerated implementation of the NDP, with reforms that were aimed at unlocking the country’s growth potential.

Government would also “redouble” its efforts to improve the regulatory environment, reduce the skills shortage and accelerate its infrastructure investment programme so as to reduce the bottlenecks constraining growth.

‘INSPIRATIONAL’ LEADERSHIP REQUIRED
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) commented that, although Fitch had retained its BBB rating for South Africa, it was still “very concerning” that the country continued to attract negative attention through its enduring labour instability.

Seifsa CEO Kaizer Nyatsumba said in a statement that the 0.6% contraction in the country’s GDP in the first quarter of the year would “certainly” have been a factor in Fitch’s decision.

“South Africa needs inspirational leadership to get out of the current economic turmoil. Such leadership was shown in the past two weeks by Mineral Resources Minister Ngoako Ramatlhodi, whose intervention in the long-running strike in the platinum sector appears to have made a difference.

“[But] we can do with more leadership of the kind shown by Ramatlhodi as we can ill afford a situation where even more people lose their jobs as a result of company closures,” he commented.

INCREASINGLY NERVOUS
Schultz added that markets would now look to ratings agency Standard & Poor’s (S&P’s) latest rating review, which was scheduled to be published after the local market closed on Friday.

“We are increasingly nervous about the reviews, in light of the deterioration in domestic labour relations, the worsening real economic outlook and the composition of the new Cabinet.

“As such, we have become more open to the risk that South Africa could very well face a one-notch downgrade this evening. This would bring the country’s long-term foreign-currency credit rating (BBB with a negative outlook currently) to its lowest since 2000,” he said.

In much the same way as Fitch had done, however, Schultz added that S&P may stall a downgrade “for now” to see whether South Africa’s fiscal consolidation plans remained intact come the October medium-term budget and to give the new Cabinet time to show that it was “up to the challenge” of pushing forward the NDP and living up its assurances that policy continuity would prevail.

“At the very least, we expect S&P to bring its higher local-currency rating of A- in line with the foreign-currency rating of BBB,” he concluded.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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